UNIVERSITA’ DEGLI STUDI DI PADOVA DIPARTIMENTO DI SCIENZE ECONOMICHE ED AZIENDALI “M.FANNO” CORSO DI LAUREA MAGISTRALE IN Economics and Finance TESI DI LAUREA “THE EFFECTS OF ECB’S MONETARY POLICY ON BANKS’ INVESTMENT DECISIONS” RELATORE: CH.MO PROF. Francesco Zen LAUREANDA: Margherita Tessari MATRICOLA N. 1207503 ANNO ACCADEMICO 2019 – 2020 Il candidato dichiara che il presente lavoro è originale e non è già stato sottoposto, in tutto o in parte, per il conseguimento di un titolo accademico in altre Università italiane o straniere. Il candidato dichiara altresì che tutti i materiali utilizzati durante la preparazione dell’elaborato sono stati indicati nel testo e nella sezione “Riferimenti bibliografici” e che le eventuali citazioni testuali sono individuabili attraverso l’esplicito richiamo alla pubblicazione originale. The candidate declares that the present work is original and has not already been submitted, totally or in part, for the purposes of attaining an academic degree in other Italian or foreign universities. The candidate also declares that all the materials used during the preparation of the thesis have been explicitly indicated in the text and in the section "Bibliographical references" and that any textual citations can be identified through an explicit reference to the original publication. Firma dello studente _________________ 2 TABLE OF CONTENTS: 1. INTRODUCTION ............................................................................................................. 5 2. ECB’S MONETARY POLICY ........................................................................................ 7 2.1. Conventional monetary policy ..................................................................................... 11 2.1.1. Open Market Operations ....................................................................................... 11 2.1.2. Standing Facilities ................................................................................................. 14 2.1.3. Minimum Reserve Requirements .......................................................................... 17 2.2. Unconventional monetary policy ............................................................................. 19 2.2.1. Measures of the second phase of crisis: SMP, VLTROs and OMT ................. 21 2.2.2. Targeted Longer-Term Refinancing Operations .............................................. 24 2.2.3. Asset Purchase Programme .............................................................................. 27 2.2.4. Forward Guidance ............................................................................................ 37 3. MONETARY POLICY TRANSMISSION MECHANISM ........................................... 38 3.1. Traditional Channels .................................................................................................... 38 3.1.1. Interest Rate Channel............................................................................................. 38 3.1.2. Asset Price Channel ............................................................................................... 39 3.1.3. Credit Channel ....................................................................................................... 40 3.2. Transmission channels of Quantitative Easing ........................................................ 45 4. FOCUS ON PORTFOLIO REBALANCING CHANNEL ............................................ 47 4.1. Literature review .......................................................................................................... 49 5. THE QUANTITATIVE ANALYSIS ............................................................................. 60 5.1. The framework ............................................................................................................. 60 5.2. The model ................................................................................................................ 63 5.2.1. Description of the procedure ............................................................................ 63 5.2.2. The sample ........................................................................................................ 65 5.2.3. Variables and expected results ......................................................................... 66 6. MODEL AND RESULTS ............................................................................................... 73 6.1. The Italian case ............................................................................................................ 73 6.1.1. Pooled OLS ........................................................................................................... 75 6.1.2. Fixed Effects Model .............................................................................................. 76 6.1.3. Random Effects Model .......................................................................................... 78 6.1.4. Other diagnostics ................................................................................................... 85 6.2. The German case ..................................................................................................... 87 3 6.2.1. Pooled OLS ...................................................................................................... 89 6.2.2. Fixed Effects Model ......................................................................................... 90 6.2.3. Random Effects Model ..................................................................................... 90 6.2.4. Other diagnostics .............................................................................................. 95 7. CONCLUSIONS ............................................................................................................. 98 BIBLIOGRAPHY ................................................................................................................ 101 APPENDIX .......................................................................................................................... 109 4 1. INTRODUCTION Since the crash of Lehman Brothers in 2008, from which started a global financial crisis for which banks have suffered a hard period of turmoil, and which, in particular in Europe, was prolonged by the subsequent sovereign debt crisis that affected some countries like Portugal, Irelands, Italy, Greece and Spain, monetary policy has played an important role trying to stabilize the situation and achieve its announced objectives. In this context, numerous economic and monetary maneuvers have been undertaken to counteract the malfunctioning of the money market. Nevertheless, these frictions have caused a change in the monetary policy transmission mechanisms: the traditional ones no longer fulfilled their function. From this, the need for European Central Bank to implement unconventional (or non-standard) monetary policies to restore the functioning of the transmission channels. This work focuses on the role of ECB and aims at understanding how different monetary policy actions have influenced banks’ behaviors in terms of loans, investment portfolio, risk bearing. We will work on a sample of 50 banks: 25 Italian and 25 German. This choice is made with the aim to compare different reactions of vulnerable and less vulnerable countries (respectively, Italy and Germany) generated by the implementation of ECB’s monetary policy. Our analysis is focused on the portfolio rebalancing channel: we will demonstrate its existence considering changes of the lending activity of banks towards customers, both firms and households, in relation to the introduction of unconventional monetary policies. In detail, we explore the relation between loans and the investment in securities, expanding the investigation to reinvestment decisions guided by the desire to maintain the portfolio at a certain risk and duration threshold. The equation will be calculated using a panel regression model, since, as we will learn in the respective chapter, it is suitable for our study. We will consider a time span that goes from 2011 to 2019. In detail, in Chapter 2 we will introduce the European Central Bank, its role and its objectives. Firstly, conventional monetary policies will be analyzed focusing on the instruments at the disposal of the ECB for its purposes; secondly, we will treat the unconventional ones used to face the turbulence situations from 2008 on. General consequences due to the adoption of them will be considered. In Chapter 3, the attention will be shifted to the transmission mechanism of the monetary policy. 5 Traditional channels, which include the interest rate c., the asset price c. and the credit c., and other new channels that have emerged as a result of the unconventional monetary policies, like direct pass-through c., portfolio rebalancing c., and signaling c. will be described. Emphasis will be given to the portfolio rebalancing channel, that will be analyzed in detail in Chapter 4. It has effects on the financial market, since the yields on a broad range of assets are lowered. This will make the lending activity of banks becoming more attractive. In addition, we will make a literature review of previous works that considered the portfolio rebalancing channel to measure the effects of European Central Bank’s monetary policies. Dynamics and consequences of its transmission of the monetary policy will be analyzed. In Chapter 5 we will introduce the quantitative analysis that we want to consider. The approach will be described, as well as the sample chosen.