The Bank lending channel and sovereign risk: Effects on significant and less significant banks after the implementation of the Banking Union

Abstract

The Banking Union (BU) has given rise to the distinction between two types of banks, significant banks and less significant ones. This distinction may have produced asymmetries in the transmission of monetary policy, which has not been analysed by the previous literature. This paper tries to fill this gap in the literature by analysing the differences that monetary policy changes have on the loan supply of significant and less significant banks. Our sample consists of banks from the euro area and spans 2014 to 2020. Our empirical model, which is based on the System Generalized Method of Moments (System-GMM) methodology, regress the loan supply growth of each bank on monetary policy and sovereign risk indicators, significant and less significant banks dummies, and a group of control variables. Our results show that, although the BU may have well contributed to a smoother transmission of the monetary policy through the bank lending channel, there are still differences in how monetary policy changes affect the loan supply of significant and less significant banks. The different behaviour of the bank lending channel is observed mainly in countries with low sovereign risk, where the bank lending channel is only effective reducing the loan supply of less significant banks. Our results indicate that greater banking integration is necessary in the euro area.