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Information Monopolies and Monetary Policy Pass Through

Date: 22nd February 2019
Time: 13:00
Location: KB1-11, First Floor, Kemmy Business School
Department of Economics Seminar
Dr. Fergal McCann
Central Bank of Ireland
Information Monopolies and Monetary Policy Pass-Through 
Date: Friday 22nd February, 13h00-14h00
Venue: Kemmy Business School, KB1-11
All are welcome to attend.
Fergal McCann is a Head of Function within the Central Bank of Ireland’s Financial Stability Directorate. His research work covers the mortgage and Small and Medium Enterprise credit markets, loan defaults, macroprudential policy, stress testing, monetary policy pass-through, mortgage modifications and Non-Performing Loan resolution. 
We empirically investigate the role of frictions in bank-borrower relationships on the transmission channel of monetary policy. We argue that banks’ incentives to pass on reductions in their funding costs depend on the ease at which their borrowers can solicit outside competition for their financing. We test this hypothesis by comparing the loan spreads of small bank-dependent firms with those of group-affiliated and large firms. To limit the impact of the endogeneity of monetary policy to macro conditions, we restrict our analysis to firms which have an investment-grade credit rating. Using a large sample of French firms, we show that following the ECB’s monetary policy stimulus in the winter of 2008, the loan spreads (banks’ mark-up) of small bank-dependent firms increased by 42 basis points more than those of large and group-affiliated firms. This effect is robust, but at a lower magnitude, when using alternative measures of bank-dependency based on firms’ debt concentration with a main lender, and controlling for firm size and group-affiliation. We also show that pass-through is stronger in counties with lower levels of local bank market concentration (HHI), but that this effect only holds for larger (or more diversified) borrowers. We perform several further tests to rule out a risk premium story. First, we find no evidence for a flight-to-quality effect for stand-alone SMEs at this time. Second, we find no similar pricing impact when including in our sample speculative-grade firms and assigning treatment by firms’ credit rating. Our evidence is in line with theories which show that banks’ information monopoly allows them to charge higher rates to their ‘locked-in’ borrowers.
Department of Economics Seminars