Quantitative easing, small firms, credit access and the real economy: Who benefits the most?

Quantitative easing, small firms, credit access and the real economy: Who benefits the most?

Anne Kathrin Funk, Research Analyst in the Monetary Policy Strategy Division of the European Central Bank.

The views expressed here are those of the author and do not necessarily reflect those of the ECB or the Eurosystem.

In response to the Corona-crisis, the ECB announced its plan to purchase a very large additional amount of EUR 1.3 billion of private and public sector securities under the umbrella of the Pandemic Emergency Purchase Programme (PEPP). This comes in addition to the quantitative easing programme that the ECB has already been conducting since 2015, with the central bank having already accumulated EUR 2.3 billion worth of government bonds under the Public Sector Purchase Programme (PSPP). While there is ample evidence that the PSPP has been successful in lowering the long end of the yield curve, it is less clear whether the program improved credit access and funding conditions for the corporate sector, especially for small firms, and the extent to which affected the macroeconomy. The German constitutional court even argued that the ECB exceeds its mandate by conducting the PSPP (Bundesverfassungsgericht, 2020).

Small firms face more difficult financial access
In a recent study, I analyse the effects of the PSPP on credit access, employment, and investment for small and medium sized firms using firm-level data from the Survey on the Access to Finance of Enterprises (Funk, 2020). Small firms play an important role in the transmission of monetary policy to the real economy. They employ the majority of the labour force, but face more difficult access to finance and higher credit costs. My analysis estimates the effect of the ECB’s government bond purchases (measured as a share of the government bond market size) on a variety of indicators of credit access, as well as on employment and investment growth. The estimates control for credit demand, firm’s balance sheet characteristics and macroeconomic conditions.

Smaller firms in the periphery of the euro area benefit the most
The figure below shows the estimated impact on credit supply, credit availability, bank loan availability, financial constraints for credit and bank loans, the interest rate, employment and investment growth. The ECB’s PSPP improved credit access to small and medium sized firms. It is correlated with a higher availability of credit lines and bank loans, less financial constraints and lower interest rate charged on credit lines (see chart).

Effect of the PSPP on SMEs’ credit access, employment and investment growth

Notes: The figure illustrates estimated effect of the PSPP as share of government bond market size on SMEs’ credit access as well as employment and investment growth. Credit supply, credit availability, bank loan availability, employment growth and investment growth are equal to one, if a firm reported an improvement/increase, and zero otherwise. Financial constraints with respect to credit/bank loans (FC) is equal to one, if a firm is credit constraint, and zero otherwise (the chart shows the inverse effect on the constraint, so a positive coefficient denotes a reduced constraint). The interest rate is the rate, charged on a credit line, which a firm applied for over the past six months (the chart shows the inverse effect, so a positive coefficient denotes a lower interest rate).. Confidence intervals are two standard deviations.

I refine my estimates and find that the effect is stronger for firms in the periphery of the euro area and smaller firms – those who need the most support. The impact of the PSPP is amplified by banks which hold a higher share of sovereign debt on their balance sheet or which are less capitalized.
The PSPP not only affects credit access, but also stimulates employment and investment growth of small firms. Hence, a quantitative easing programme is able to affect output and ultimately consumer prices, which is important evidence for an effective transmission channel of unconventional monetary policy. However, the analysis cannot identify to what extent banks tend to increase risk-taking by lending to more risky firms.

Bundesverfassungsgericht (2020), “ECB decisions on the Public Sector Purchase Programme exceed EU competences”, Press Release No. 32/2020, 5 May.
Funk, A. (2020), “Quantitative easing in the euro area and SME’s access to finance: Who benefits the most?”
Personal Website Anne Kathrin Funk