Are monetary policy shocks causal to bank health? Evidence from the euro area
Time series, high-frequency data on euro area banks, data on bank health in the euro area The data were used for an event study to examine the (causal) influence of ECB monetary policy on a range of bank health indicators, sample 1999 to 2017, ECB meeting data and monthly data. The study shows through a high-frequency identification approach that the causal effect of conventional monetary policy action and communication by the ECB on bank stock prices differed over time, whereas its influence on bank financing costs was robust. The study also provides new evidence showing that information effects related to policy easing surprises in the aftermath of the 2008 financial crisis hampered the ECB efforts to improve bank health and that its Odyssean communication signals (related to forward-looking announcements of policy easing) supported bank health during this phase. Local projections suggest that the response of banks to monetary policy shocks displayed some persistence, where ECB policy surprises and communications that shifted up (down) the yield curve were normally positive (negative) for bank health. The findings solicit a new perspective when assessing the influence of the ECB’s monetary policy measures on euro area banks. For details see the summary table of the dataset and the (forthcoming) publication in Journal of Macroeconomics.