A capital structure channel of monetary policy

By Benjamin Grosse-Rueschkamp, Sascha Steffen, Daniel Streitz. Journal of Financial Economics, 2018

159 citations recorded by the source corpus.

Abstract We study the transmission channels from central banks’ quantitative easing programs via the banking sector when central banks start purchasing corporate bonds. We find evidence consistent with a “capital structure channel” of monetary policy. The announcement of central bank purchases reduces the bond yields of firms whose bonds are eligible for central bank purchases. These firms substitute bank term loans with bond debt, thereby relaxing banks’ lending constraints: banks with low tier-1 ratios and high nonperforming loans increase lending to private (and profitable) firms, which experience a growth in investment. The credit reallocation increases banks’ risk-taking in corporate credit.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/45c007d4fc7f18bf361ac45ae74e15bec658a715

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Citations in the corpus

• It’s What You Say and What You Buy: A Holistic Evaluation of the Corporate Credit Facilities (2020, background): “That is, the liquidity of investment-grade CDS contracts deteriorated at the beginning of March relative to the liquidity of high yield CDS contracts, suggesting that the muted response of investment-grade CDS spreads documented by Haddad et al. (2020) may be due to illiquidity of the contracts.”