Microsoft Word Altavilla Boucinha Peydro ep word version docx

6 Conclusions 
In this paper, we have analysed the implications of alternative monetary policy actions on bank 
profitability and on market-based measures of bank shareholder value and bank risk. We analyse 
the euro area, which provides an interesting case study as it includes substantial bank and country 
heterogeneity within a monetary union where a broad set of unconventional policies, including 
negative interest rates, credit and quantitative easing have been implemented. Moreover, we exploit 
proprietary ECB data on individual bank balance sheets since 2007, and data from commercial 
providers since the creation of the euro area. We have tackled our question by analysing a micro 
and a macro econometric model, different types of data – ranging from the daily frequency of the 
event study to the quarterly frequency of the bank balance sheet indicators – and over different 
sample periods.
The results suggest some robust findings. First, monetary policy easing, summarised as either a 
decrease in short-term interest rates or a flattening of the yield curve, is only associated with lower 
bank profits if there are no appropriate controls for the endogeneity of monetary policy to bank 

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financial health – especially during the crisis period – as well as to current and expected aggregate 
economic and financial conditions. 
Second evidence from both a panel data model that uses individual bank balance sheet data and a 
dynamic macro model that uses more aggregate data, suggest that following a monetary policy 
shock, the various components of bank profitability react asymmetrically. More specifically, since 
the impact on loan loss provisions largely offsets the one on net interest income, the overall effects 
of monetary policy on bank profitability are muted. Importantly, our analysis suggests that keeping 
interest rates low for long might have negative consequences for bank profitability. However, our 
results suggest that it takes a long period of time for monetary policy to exert a substantial adverse 
effect on bank profitability as a result of looser policies, as accommodative monetary conditions 
support real economic activity which, in turn, has a positive impact on bank profitability, thereby 
offsetting the adverse impact. Moreover, policy easing tends to be more beneficial in relative terms 
for more efficient banks and for banks with lower asset quality. At the same time, banks engaging 
more extensively in maturity transformation activities tend to have a more positive reaction to a 
steepening of the yield curve.
Finally, market-based expectations on future bank profitability are analysed looking at the high-
frequency changes in bank stock returns around monetary policy announcement dates. Financial 
market evidence suggests that both bank debtholders and shareholders tend to be better off when 
the central bank announces new, accommodative monetary policy. This is important not only for 
financial stability and systemic risk but also for the possible distributional consequences that these 
policies may have on bank shareholders and debtholders, including depositors. Though our results 
show that monetary policy easing does not hamper bank profitability, shareholder and bond-holder 
values, there could be distortionary effects possibly related to excessive bank risk-taking (Jiménez et 
al, 2014; Ioannidou, Ongena and Peydró, 2015) and zombie lending/loan ever-greening practices 
(Freixas, Laeven and Peydró, 2015). Our analysis does not rule out these distortions at least to the 
extent that they are not immediately priced in by market participants. 

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