Research Technical Paper: Bank Asset Quality and Monetary Policy Pass-Through

A research paper by David Byrne and Robert Kelly examines the quality of bank credit in the euro area and its effect on the efficient pass-through of monetary policy actions. In this work, pass-through refers to how effectively monetary policy, specifically low interest rates as set by the European Central Bank (ECB), are passed on by commercial banks to borrowers. The paper considers the period 2008 to 2014.

The research finds:

• Distressed loan books, as well as having direct implications for profitability, hamper banks’ ability to supply credit and keep loan prices low in the light of ECB interest rates. Specifically, non-performing loans (NPLs) played a significant role in the differences in the  rate of pass-through of interest rate cuts in the euro area post-crisis
• Bigger banks, more liquid banks and banks with greater deposit-to-liability shares were found to have lower lending rates. In turn, banks with a high degree of impaired lending were found to have higher interest rates and a one percentage point increase in the bank’s share of impaired loans lowers immediate pass-through by three percentage points
• This underlines the importance of resolving bad loans in order to lower loan pricing and improve the functioning of credit supply to Europe's heavily bank credit dependent firms.

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

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