The Impact of a Low Interest Rate Environment: Empirical Evidence from the Euro Area Bank Lending Survey

This paper investigates the effect of a protracted period of low monetary policy rates on loosening of banks’ credit standards concerning enterprises, households and consumer loans. Using a balanced panel dataset of 9 countries that have taken part ever since the initiation of the Euro area Bank Lending Survey, this study focuses on three different time frames of pre- (2002Q4-2008Q3), mid- (2008Q4-2010Q4) and post- (2011Q1-2014:Q4) financial crisis. The results indicate that low short term interest rates prior to the crisis produce a disproportionate loosening of credit standards in all three types of loans. In spite of the scope of expansionary monetary policy documented primarily in the post-crisis sample, the data analysed indicates that negative Taylor-rule residuals lead only to a softening of total lending standards for enterprises loans. Additionally, the outcomes of this study indicate that the European Central Bank 3 year long-term refinancing operations brought a fall in the progress of banks’ credit tightening. However, the benefits of this have yet to be experienced in the EA9 real economy. While regrouping the original sample in stressed nations, the results suggest that excessive risk-taking in bank lending behaviour took place, especially during periods of low monetary policy rates both pre- and post-crisis.