The impact of non-banking financial institutions on monetary policy transmission in Euro area
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The impact of non-banking financial institutions on monetary policy transmission in Euro area Darja Milic1 Received: 8 February 2018 / Accepted: 5 August 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract The structure of financial intermediation has been subject to significant changes in last decades. The share of banks in the financial system is declining while non-banks are increasing, and this trend is especially evident in Euro area. The changing structure of financial intermediation has been subject of increasing attention of monetary authorities, as it may generate significant changes in the way monetary policy is transmitted to the economy. The goal of this research is to study the impact of non-banking financial institutions on monetary policy transmission in Euro area. This analysis applies a Bayesian vector autoregression model and identifies monetary policy shock in Euro area using three identification strategies—recursive identification, sign restriction and external instruments in the form of surprise changes in market rates in a short timeframe around ECB monetary policy meetings and announcements. The results show that non-banking financial institutions do not dampen transmission of monetary policy in Euro area—in response to monetary contraction they contract their balance sheets for the most part, while banks have more dampening effect or contract their assets less. Keywords Monetary policy · Euro area · Financial intermediation · VAR · Recursive identification · High-frequency instruments (HFI) JEL Classification E52 · G21 · G23
1 Introduction The structure of financial system has been subject to significant changes in last two decades. The role of non-banks in financial intermediation has been increasing, lead-
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Darja Milic [email protected] Central bank of Montenegro, Bulevar Sv. Petra Cetinjskog 6, 81000 Podgorica, Montenegro
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D. Milic
ing to the structural shift in financing away from traditional bank loans to financial intermediation via capital markets. This change was driven by growing financial innovations, supported by low inflation and risk premia environment, technological progress, financial deregulation and integration (ECB 2008). Following the financial crisis, slow recovery of bank lending and tighter bank regulation created stimulative environment for further expansion of market-based intermediaries. As a result, the share of banks in the financial system is declining while non-banks are increasing, and this trend is especially evident in Euro area (FSB 2017). Financial intermediation in Euro area was traditionally played by banks, which have been main propagators of monetary stimulus. However, by providing alternative financing to the economy, growing non-banking sector tends to dampen the special role of banks in financial intermediation. These institutions are also known as shadow banks and defined as “the system of credit intermediation that involves entities and activities outside the regular banking system” (FSB 2011). Compared to bank
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