Bank lending standards and monetary transmission in the euro area

This paper analyzes the role of banks in the transmission of monetary policy shocks in the euro area using a FAVAR model and survey data from the ECB’s Bank Lending Survey. We find that banks primarily respond to a contractionary policy shock by tightening lending standards rather than adjusting lending rates. Lending standards react more heterogeneously than market yields, while perceived loan demand varies even more across countries. These findings highlight the importance of both credit supply and demand in the heterogeneous transmission of monetary policy. • We study the role of banks for the monetary transmission in the euro area. • We use a FAVAR model and Bank Lending Survey data for our analysis. • Banks mainly respond to a policy shock by adjusting their lending standards. • Lending standards and loan demand respond heterogeneously across member countries.