One Size May Not Fit All: Banking Fragmentation and European Monetary Policies

This paper investigates the impact of ECB policies on credits considering financial and banking fragmentation for member countries. Using European data from the past decade, a period characterised by growing fragmentation, we estimate regional SVAR models to study the impact of conventional and unconventional measures on price and volume indicators of fragmentation. The risk-taking channel is studied using GVAR models in order to document the consequence of financial fragmentation at the national level. We find that unconventional monetary policies increase credit volumes in peripheral countries. In addition, monetary policies can alleviate financial and banking fragmentation, but mostly in terms of price dispersion rather than credit volume. Finally, unconventional monetary policies increase capital outflows outside the Eurozone.