One Monetary Policy and Two Bank Lending Standards: A Tale of Two Europes

This paper underscores the underappreciated role of bank mortgage lending standards in conjunction
with imbalances stemming from the common monetary policy framework as drivers of divergent economic
trajectories in the euro area’s core and periphery countries. To illustrate the mechanism, we compute a
country-specific monetary policy stance gap and estimate the panel VAR model of credit and
macroeconomy for each group. While the widening gap—the accommodative stance of the ECB relative
to individual economic conditions—induces a similar increase in the demand for mortgage credit in both
regions, it is followed by markedly different responses of the supply side of mortgage credit: bank
mortgage lending standards are relaxed (tightened) in periphery (core) countries, which can rationalize
vastly different responses in mortgage credit, residential investment, and housing prices between the two
Europes. In searching for the source of different bank lending behaviors, we find that banks in core
countries, subject to tighter macroprudential policies and reduced profit margins, increase cross-border
lending to periphery countries, enabling them to relax lending standards toward mortgage loans.