The ECB's Unconventional Monetary Policies: Have they lowered market borrowing costs for banks and governments?

This paper evaluates the impact of the European Central Bank's (ECB) unconventional policies on bank and government borrowing costs. We employ event-based regressions to assess and compare the effects of asset purchases and exceptional liquidity announcements on the money markets, covered bond markets, and sovereign bond markets. The results show that (i) exceptional liquidity measures (3-year loans to banks and setting the ECB deposit rate to zero) significantly reduced persistent money market tensions and that (ii) asset purchases were the most effective in lowering the refinancing costs of banks and governments in the presence of high sovereign risk. In particular, we show how the interdependence between sovereign and bank risk amplifies the effectiveness of the ECB's asset purchases: bank-covered bond purchases diminish sovereign spreads while sovereign bond purchases reduce covered bond spreads.