The end of the credit channel in the euro zone?

The ECB\'s monetary policy is normally transmitted to the euro-zone economy via the credit channel, i.e. by the effect of the ECB\'s policy rates on bank lending rates. However, this normal monetary policy transmission channel in the euro zone is threatened by three developments, related to European banking regulations; which is serious, because the ECB would then have difficulty influencing lending:

− the new regulatory ratios for banks (liquidity, stable funding, capital) may lead to bank credit rationing; the adjustment would take place no longer via lending rates but via the quantity of loans granted. For monetary policy to become efficient again, therefore, the ECB would have to be able to influence the balance-sheet structure of the banks (e.g. by buying loans or other assets from them);

− the high correlation in the euro zone between sovereign risk and banking risk, hence between sovereign risk and private borrower risk, due to the huge government bond portfolios held by the banks. This correlation means that bank lending rates no longer depend on the ECB\'s policy rates but on sovereign risk premia. For monetary policy to become efficient again, the ECB must therefore be able to influence these premia, which is one of the justifications for the ECB’s government bond purchases (SMP and then OMT);

− the transition to the \"originate to distribute\" model for credit to the economy. Due to regulatory ratios, banks no longer want to put the loans they make on their balance sheet; they therefore make these loans and structure them so that they can be bought by institutional investors. If the loans are ultimately booked in the balance sheets of these investors (insurers, for example) and no longer in the banks’ balance sheets, lending rates will no longer depend on banks\' cost of funding but on the return required by institutional investors on their assets, which the ECB cannot easily influence.