The Great Lockdown: pandemic response policies and bank lending conditions

Abstract
This study analyses the policy measures taken in the euro area in response to the outbreak and the escalating diffusion of the coronavirus (COVID-19) pandemic. We focus on monetary, microprudential and macroprudential policies designed specifically to support bank lending conditions. For identification, we use proprietary data on participation in central bank liquidity operations, high-frequency reactions to monetary policy announcements, and confidential supervisory information on bank capital requirements. We show that, in the absence of the funding cost relief associated with the pandemic response measures, banks’ ability to supply credit would have been severely affected. The results are robust to controlling for other concomitant policy measures such as government guarantees or quantitative easing. Our findings also indicate thatthe coordinated intervention by monetary and prudential authorities amplified the effects of the individual measures in supporting liquidity conditions and helping to sustain the flow of credit to the private sector. Finally, we find that, while monetary and prudential policies did not increase the zombification of the economy, in absence of these measures, the pandemic would have led to a significantly larger decline in firms’ employment. Joint paper with Francesca Barbiero, Miguel Boucinha, and Lorenzo Burlon.

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