The financial crisis has been characterised by fragmentation in the transmission of monetary policy, as reflected in the high dispersion in interest rates on bank loans to euro area firms. Heterogeneity in interest rate pricing also emerged within countries, suggesting that macroeconomic differences were not the only driver of dispersion. Using individual bank data for twelve euro area countries covering almost a decade since the start of the crisis, we identify the balance sheet characteristics that contributed to this fragmentation and document the share of the deviation in interest rates from policy rates that is accounted for by each characteristic. Interest rate pass-through heterogeneity is estimated using an error correction framework that accounts for macroeconomic variation and market structure, and includes standard bank characteristics, such as size, capital and liquidity, as well as variables that capture banks’ funding access, risk and asset quality. Results show incomplete pass-through of changes in money market rates targeted by the central bank to firms’ lending rates. Sovereign bond yields are shown to affect the cost of finance for firms, particularly in stressed countries and market concentration is associated with smaller reductions in lending rates. With regard to bank characteristics, asset impairment leads to a significant decrease in pass-though. Bank size, as a proxy for market power, and reliance on central bank funding affect pass-through for smaller loans, while capital is more significant for larger loans.

Do climate-oriented regulatory policies affect the flow of credit towards polluting firms? We match loan-level data to firm-level greenhouse gas emissions to assess the impact of the Paris Agreement. We find that, following this agreement, European banks reallocated credit away from polluting firms in relative terms. Specifically, euro area banks’ loan share to more polluting firms decreased by about 3percentage points compared to less polluting (or “green”) firms after the 2015 Paris Agreement (COP21). This result is stronger for banks that are well capitalized, have lower credit quality, and are less profitable.

This paper investigates the impact of the first system-wide capital relief package adopted by euro area prudential authorities, to support bank lending to firms at the outbreak of the COVID-19 pandemic. By leveraging confidential supervisory and credit register data, we uncover two main findings. First, capital relief measures support banks’ capacity to supply credit to firms. Second, the type of relief matters. Banks increase their credit supply in response to measures that reduce binding capital requirements and affect banks’ ability to distribute dividends. By contrast, discretionary relief measures that do not affect dividend policy are met with limited success. Moreover, requirement releases are more effective for banks with ex-ante lower capital headroom and for lending to smaller firms. These findings provide novel insights on the design of effective bank capital requirement releases in crisis times and, more generally, of policies to support bank credit in times of economic distress.

We investigate the impact of capital requirements on bank lending across institutional sectors, focusing on their transmission channel and the interaction with monetary policy. By employing confidential loan-level data for the euro area, we find that the reaction of banks to capital surcharges for Other Systemically Important Institutions (O-SII) depends on the level of the required buffer and the institutional sector of the borrowing counterpart. Tighter requirements correspond to stronger lending contractions with targeted banks curtailing their lending mostly towards credit institutions. Loan supply to non-financial corporations is almost unchanged, mainly as a result of the incentives embedded in the ECB's targeted long-term refinancing operations. Our results provide evidence on the interaction between macroprudential and monetary policy, and the positive effects of combining two different sets of incentives to support the resilience of the banking system and credit supply to the real economy.