What is the Impact of a Major Unconventional Monetary Policy Intervention?

Abstract How does the credible announcement of an unconventional monetary policy intervention affect bank lending standards during crises? We use a major central bank announcement, the “whatever it takes” speech of the European Central Bank President that boosted the capital of banks, as a natural experiment. We compare changes in lending standards of subsidiaries of euro area versus other banks in a third country, Mexico. The speech reversed a prior trend of euro area banks augmenting their risk-taking via loan growth, lending rates, and credit risk. Our findings show that policies that amount to capitalization can reduce risk-taking in times of stress, adding a new dimension to the bank capital channel. (JEL: E51; G21; F34)