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MONETARY POLICY AND BANKS IN THE EURO AREA: THE TALE OF TWO CRISES

 Lucrezia Reichlin
London Business School and CEPR

 

Abstract

The paper is a narrative on monetary policy and the banking sector during the two recent euro area recessions. It shows that while in the two episodes of recession and financial stress the ECB acted aggressively providing liquidity to the banking sector, the second recession, unlike the first, has been characterized by an abnormal decline of loans with respect to both real economic activity and the monetary aggregates. It conjectures that this fact is explained by the postponement of the adjustment in the banking sector by showing that banks, over the 2008-2012 period, did not change neither the capital to asset ratio nor the size of their balance sheet relative to GDP and kept them at the pre-crisis level. The paper also describes other aspects of banks’ balance sheet adjustment during the two crises.

  

 

Keywords: Economic recessions, Financial system, ECB policies, Bank behavior

JEL classifications: E44, E58, G21

  

Correspondence:

Lucrezia Reichlin

London Business School Direct line

Regent’s Park

London NW1 4SA

tel:+44(0) 2070008435

email: lreichlin@london.edu


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