Making Room for the Needy: The Credit-Reallocation Effects of the ECB’s Corporate QE
Óscar Arce, Sergio Mayordomo, Ricardo Gimeno
Review of Finance, Volume 25, Issue 1, February 2021, Pages 43–84, https://doi.org/10.1093/rof/rfaa020
We analyse how the ECB’s purchases of corporate bonds under its Corporate Sector Purchase Programme (CSPP) affected the financing of Spanish firms. We first document that the announcement of the CSPP in March 2016 raised firms’ propensity to issue bonds. The flipside was a drop in the demand for bank loans by bond issuers. The bond-loan substitution process was driven by issuing firms’ strategic decisions (i.e., demand driven). Thus, bond issuers decreased their exposure to bank credit through the cancellation of loans with a positive time to maturity, reflecting early redemptions. Moreover, this substitution occurred before the beginning of the CSPP bond purchases.
Around 75% of the drop in bank loans previously made to debt issuers was redirected to non-bond issuing firms, which are typically smaller and with limited access to fixed-income markets. This reallocation process was led by banks with weaker liquidity positions experiencing credit outflows, which extended credit to the same firms they were rationing prior to the CSPP. Several robustness tests confirm that we are capturing a genuine credit supply-side shock stemming from the outflows of bond issuers. Moreover, the credit reallocation effect was not caused by the concomitant ECB’s Targeted Longer Term Refinancing Operations (TLTRO II), although it was amplified by the interaction between this programme and the CSPP.
This reallocation of credit was not accompanied by a significant rise in risk-taking: banks rebalanced their loan portfolio first and foremost towards safer, less leveraged, more profitable and relatively large non-issuing firms. Yet this effect was not confined exclusively to large firms but also affected medium-sized and, though to a lesser extent, micro/small companies. However, the terms and conditions of the reallocated credit were tighter and entailed more collateral with shorter maturities.
The reallocation of credit towards non-issuing firms led to an increase in the investment of these firms, whereas firms that replaced loans with bonds did not invest the new funds obtained but instead used them to repay loans. These results suggest that bank credit indeed flowed to the “needy”. However, it also made these firms more vulnerable to specific disruptions that might affect the banking system, owing to their higher leverage and dependence on bank financing.