IS UNCONVENTIONAL MONETARY POLICY MEDIATED BY BANKS’ LIQUIDITY AND SOLVENCY RATIOS? EVIDENCE FROM THE EUROPEAN BANKING SECTOR

Abstract

We try to answer the following research question: Is unconventional monetary policy (UMP) mediated by European banks’ liquidity and solvency ratios? Starting from micro-prudential tools (unconventional monetary policy), this paper focuses on the micro-prudential perspective and contributes in different ways to the existing literature. First, using supervisory reporting data from European banks (European Central Bank (ECB), Statistical Data Warehouse), provides insights into the UMP (in terms of long term refinancing operation (LTRO)) during the first phase of the COVID-19 pandemic. Second, it empirically investigates the impacts of the LTRO on the liquidity and solvency of European banks, during the Q3 2016‒Q2 2021 period. We argue that the impacts of UMP (in terms of LTRO) are strictly related to banks‘ solvency and liquidity, thus favouring the stability of the banking system. These results suggest that authorities may want to monitor the bank‘s capital ratio and the liquidity position of financial institutions, also to better understand the effects of unconventional monetary tools on lending volume. The topic of our paper is scarcely explored by similar studies; therefore, we believe that our work may fill this gap and significantly contribute to enriching the related empirical literature.