The transmission mechanism of the ECB's Corporate Sector Purchase Programme

Frank Betz, Roberto De Santis, Andrea Zaghini 04 June 2021

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On 10 March 2016, the ECB announced a set of additional measures in pursuit of its price stability objective. The package included both traditional and unconventional monetary policy measures. Notably, investment grade euro-denominated bonds issued by non-bank corporations established in the euro area were eligible for regular purchases in both the primary and secondary markets under a new programme named the Corporate Sector Purchase Programme (CSPP). 

The ECB aimed to stimulate credit provision of non-financial corporations with access to the bond market, by lowering corporate bond yields and stimulating bond issuance, as illustrated in Figure 1. Indirectly, SMEs that do not have access to the corporate bond market could also benefit from the policy, to the extent that large corporations would substitute bank loans with corporate bonds. Banks would find it profitable to provide their spare capacity to firms that do not have access to bond-based financing and, therefore, the CSPP would trigger a shift in bank loan supply in their favour. The improved funding conditions of corporations with access to the bond market and bank-dependent firms, such as SMEs, would support euro-area economic activity (Figure 1).

Figure 1 The CSPP at work

Impact of the CSPP on corporate bond yields

The impact of the CSPP on corporate bond yields is well documented. After the CSPP announcement, yields of both eligible and non-eligible bonds dropped by 20 to 30 basis points in the primary market and by 15 to 30 basis points (Figure 2) in the secondary market.1 An increase in corporate bond prices due to the CSPP results in a wealth effect, which could have implications for the real economy. However, if CSPP had only an impact on corporate bond prices, but not on issuance, then the transmission of the monetary policy would be limited in scope, given the relatively small size of the euro-area bond market.

Figure 2 The impact of the CSPP on corporate bond spreads in the secondary market

Source: Figure 1 in De Santis et al. (2018).
Notes: Corporate bond spreads are measured by the Z-spread, which is the spread over the EURIBOR curve required to discount a pre-determined cash flow (basis points). The indices are constructed as a weighted average of the individual ISINs corporate spreads with weights provided by the outstanding amount. The vertical line marks the announcement of the CSPP on 10 March 2016. 

Impact of the CSPP on corporate bond issuance

The CSPP stimulated corporate bond issuance, particularly among eligible issuers. Net issuance by non-financial corporations (NFCs) picked up immediately after the announcement of the CSPP in March 2016. Since then, it has remained stronger than in previous years (Figure 3). However, the effects of CSPP could be confounded by the other monetary policy measures included in the package announced on 10 March 2016, for example the expansion of the Public Sector Purchase programme (PSPP) – as the ECB purchases government bonds, private investors, such as banks, pension funds and insurance companies, could shift their investment to the investment grade segment of the corporate bond market. If the resulting increase in corporate bond issuance was wrongly attributed to the CSPP, it could lead to an overestimation of the CSPP’s effectiveness. Therefore, De Santis and Zaghini (2021) collect data on all bonds issued by all euro area firms in all currencies and provide an identification scheme that allows the disentanglement of the effect of the CSPP from the other contemporaneous monetary policy measures.

Figure 3 Net corporate bond issuance by non-financial corporations (billion euros, cumulated)    

Source: ECB. 
Note: Cumulated net issuance (issue minus redeemed bonds) of euro-denominated long-term debt securities by NFCs in the euro area. Monthly flows. 

Figure 4 Impact of CSPP on the probability of issuing bonds in euro relative to other currencies by CSPP eligible firms relative to ineligible firms

Source: Figure 4 in De Santis and Zaghini (2021).
Note: The bold line is the PROBIT coefficient based on an expanding rolling regression. The dotted lines provide the confidence interval at 5% and 10% levels.

The identification strategy is based on the currency of denomination of bonds. One key characteristic, which differentiates the CSPP from the other monetary policy measures, is that corporate bonds must be denominated in euro in order to be eligible to the programme. Conversely, a stimulus stemming from other ECB policy measures would instead not influence the choice of the currency of denomination of the bond.2 The empirical results suggest that:

  • the probability of issuing bonds in euro relative to other currencies significantly increased for CSPP eligible firms with respect to non-eligible firms by an estimated 14%; and
  • the increase in euro-denominated bonds is not just a switch away from another currency, but an actual increase in volume at issuer level – €10 billion purchases through the CSPP increase issuance of eligible versus non- eligible issuers by €2.5–3.3 billion.

The switch towards euro-denominated bonds by eligible corporations took time to unfold. The empirical estimates (Figure 4) suggest that the CSPP started to have a statistically significant effect from the beginning of 2017 (i.e. six months after the start of purchases). Only corporations already financing their activity on the bond market in multiple currencies could rapidly adjust to the CSPP framework. This evidence squares well with the fact that it takes time to issue a new bond on the primary market, especially by firms that do not often resort to direct bond-market financing, not to mention first timer issuers.

Impact of the CSPP on bank loan supply to SMEs

It could be argued that the CSPP favours firms that might need less support because they are relatively large and financially strong. Betz and De Santis (2021) examine whether the CSPP also benefitted firms that themselves do not issue corporate bonds using the ECB Survey on the Access to Finance of Enterprises (SAFE). The mechanism is based on a simple substitution effect. With CSPP driving down the cost of market-based funding for CSPP-eligible issuers, banks attempting to lend to these companies face lower risk-adjusted returns. In the face of lower risk-adjusted returns for CSPP-eligible issuers – banks tend to substitute their provision of credit towards corporations that are not eligible for CSPP purchases as well as towards SMEs, if lending rates decline also. 

Figure 5 Change in bank loan supply to bank-dependent firms and net bond issuance by non-financial corporations

Source: Figure 3 in Betz and De Santis (2021).
Note: The first difference is computed as one-year after minus one-year before the CSPP announcement. 

Figure 5 provides cross-country evidence consistent with this reasoning. The chart plots the change in bank loan supply to bank-dependent firms, proxied by the change in the prevalence of credit constraints to firms as measured by the ECB Survey in the year following the announcement of CSPP relative to the year before against the corresponding difference in bond issuance net of redemptions. Countries displaying a strong increase in net bond issuance also register a strong decline in credit constraints faced by non-financial bank-dependent firms (i.e. SMEs). However, the bivariate correlation shown in Figure 5 may be partially driven by unobserved factors, such as the business cycle. To empirically isolate spillovers from CSPP, Betz and De Santis (2021) provide an accurate representation of the causal chain at the micro level from the CSPP impulse to the increase in bank loan supply to SMEs. 

The empirical evidence supports the conclusion that the programme made a positive contribution to the provision of financing to bank-dependent firms, including SMEs. In a difference-in-difference setting, Betz and De Santis (2021) find that bank-dependent firms that ex-ante have a relationship with a bank subject to lower demand for syndicated loans from CSPP eligible firms are more likely to report improved access to credit post-CSPP. The CSPP-induced loan supply shift is independent from the quality of banks' balance sheets, which implies that the policy can work also in normal circumstances.

Impact of the CSPP on economic activity

The empirical results also suggest that the March 2016 monetary policy package and the CSPP fostered positive real economic outcomes. De Santis and Zaghini (2021) show that, while there was a widespread increase in investment in capital expenditures and intangible assets after March 2016, in addition CSPP eligible firms increased (relative to non-eligible firms) the purchase of marketable and equity securities and their own shares (buy-back), the holding of cash and the short-term investment expenditures. The increase in capital expenditure and the improved liquidity should have fostered more positive real economic outcomes, than otherwise.

Conclusions

Monetary policy can stimulate credit provision through the purchases of corporate bonds and, as a result, economic activity. Using bond and firm-level data, the literature has shown that the corporate bond purchase programme of the ECB led to an increase in the issuance of debt securities, stimulated economic activity and triggered a shift in bank loan supply in favour of firms that do not have access to bond-based financing. In other words, small firms, that do not have access to the corporate bond market, also benefitted from the policy. 

These results are particularly relevant, because the purchase of corporate bonds has become part of the toolkit by all major central banks including the Federal Reserve Board of the United States,3 which announced in 2020 the purchases of individual corporate bonds in the context of the coronavirus pandemic.

Authors’ note: The views expressed in this article are those of the authors and do not necessarily reflect those of the European Central Bank, the European Investment Bank or Banca d’Italia.

References

Abidi, N, and I Miquel-Flores (2018), “Who benefits from the corporate QE? A regression discontinuity design approach”, ECB Working Paper, no. 2145.

Arce, O, R Gimeno R, and S Mayordomo (2020), “Making room for the needy: the credit-reallocation effects of the ECB's corporate QE”, Review of Finance 25: 43-84.

Betz, F, and R A De Santis (2021), “ECB corporate QE and the loan supply to bank-dependent firms”, International Journal of Central Banking, forthcoming.

De Santis R A, and A Zaghini (2021), “Unconventional monetary policy and corporate bond issuance”, European Economic Review 135 (forthcoming).

De Santis, R A, A Geis, A Juskaite and L Vaz Cruz (2018), “The impact of the corporate sector purchase programme on corporate bond markets and the financing of euro area non-financial corporations”, ECB Economic Bulletin 3: 66-84.

Darmouni, O, and K Siani (2020), “Crowding-out bank loans: The effects of the Fed bond market stimulus on firms”, VoxEU.org, 29 October. 

Grosse-Rueschkamp, B, S Steffen, and D Streitz (2019), “A capital structure channel of monetary policy”, Journal of Financial Economics 133: 357-378.

McCauley, R (2020), “The Federal Reserve needs the power to buy corporate bonds”, VoxEU.org, 26 August.

Todorov, K (2020), “Quantify the Quantitative Easing: Impact on bonds and corporate debt issuance”, Journal of Financial Economics 135: 340-358.

Zaghini, A (2019), “The CSPP at work: Yield heterogeneity and the portfolio rebalancing channel”, Journal of Corporate Finance 56: 282-297.

Zaghini, A (2020), “How ECB purchases of corporate bonds helped reduce firms’ borrowing costs”, VoxEU.org, 30 January.

Endnotes

1 For the primary bond market see Li et al. (2019) and Zaghini (2019, 2020); for the secondary bond market, see De Santis et al. (2018); Abidi and Miquel-Flores (2018) and Todorov (2020).

2 Grosse-Rueschkamp et al. (2019), by using the balance sheets of listed NFCs registered in the euro area over the one-year period after 10 March 2016, also find a significant increase in a “bond debt” aggregate for investment grade (IG) firms relative to non-IG firms. However, “bond debt” in balance sheet data is a very aggregate concept, because it includes a broad set of securities (commercial papers, senior bonds and notes, subordinated bonds and notes, bonds issued in foreign currency), many of which are not targeted by the CSPP, posing a challenge for the assessment of the ECB policy measures. For example, an increase in issuance of debt in foreign markets would increase bond debt, but not affect the euro-area bond market. One cannot rule out that the reported increase in aggregate corporate debt of the selected NFCs was due to issuance not suitable for CSPP purchases, such as an increase in debt due to M&As, issuance in foreign markets and currencies, private placements and short-term issuances. In a similar exercise, Arce et al. (2020) documented a surge in bond placements one-quarter after the CSPP announcement by Spanish eligible firms.

3 See Darmouni and Siani (2020) and McCauley (2020).

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Topics:  EU policies Financial regulation and banking

Tags:  CSPP, ECB, euro area financing, Corporate Sector Purchase Programme

Economist, European Investment Bank

Senior Lead Economist, Business Cycle Analysis Division, DG Economics, ECB

Senior Lead Economist, ECB; Senior Advisor, Banca d'Italia

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