Economic Letter: the impact of the Extended Asset Purchasing Program (EAPP) on Irish resident banks

An Economic Letter by Katharina Bergant considers whether banks could use the increase in liquidity and/or capital to invest in riskier – and therefore higher yielding – assets. The key findings of the analysis are as follows:

• In contrast to rebalancing towards riskier assets, Irish banks increase their holdings of securities that are also bought under the EAPP.
• A number of external factors might limit the pass-through of asset purchases to the real economy through the banking system, including:

• Regulation which might discourage banks from holding riskier assets
• Banks enjoying the valuation gains from the growing prices of European public securities
• Banks might have already held enough liquidity and capital before EAPP.

• Lastly, whilst one incentive for portfolio rebalancing would be to use increased levels of liquidity and/or capital to issue more loans, the research finds that households and corporates in Ireland are currently deleveraging.

The views presented in Economic Letters are those of the authors alone and do not necessarily represent the official views of the Central Bank of Ireland.

Economic Letters are published on the Central Bank’s website here.