European Central Bank working paper finds monetary policy has a much larger effect than macroprudential policy on euro area corporate loan rates

The European Central Bank published Working Paper No 3057 assessing how monetary policy and macroprudential policy affect banks’ pricing of new loans to euro area non-financial corporations. Using loan-level evidence from 2019–2023, the paper finds that changes in monetary policy have an order-of-magnitude larger impact on corporate lending rates than changes associated with macroprudential capital tightening, although the macroprudential effect becomes more pronounced when banks are closer to regulatory capital constraints. The analysis combines AnaCredit corporate loan microdata with supervisory bank data for around 16 million new loans across 15 euro area countries, using the 3-month overnight indexed swap rate as the monetary policy measure and banks’ capital-to-asset ratios as a proxy for the effect of capital buffer requirements. In the most saturated specifications controlling for time-varying firm demand, a one standard deviation increase in the policy-rate proxy (0.9 percentage points) is associated with about 58–60 basis points higher loan rates, versus about 5.8 basis points for a one standard deviation increase in bank capitalisation (2.4 percentage points). The paper also reports that monetary policy pass-through weakens materially when rates are close to or below zero, and that the effect of higher bank capitalisation on loan rates is larger for banks with limited capital headroom above buffer requirements, with responses around 50% larger when headroom is near zero than for banks with average headroom. Robustness checks using high-frequency monetary policy shocks and volume-weighted regressions yield similar qualitative conclusions, and the paper argues that with ample capital headroom, further tightening or releasing macroprudential buffers would be unlikely to materially change loan supply or lending rates.