MNI POLICY: Corporate Bond Buys A Useful Tool - ECB Economist

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank's purchase of corporate bonds

helped ease financing conditions for euro area firms without access to

bond-based financing, a paper published on Wednesday has concluded.

     The ECB began buying investment-grade euro-denominated bonds issued by

non-financial corporations in March 2016, under the Corporate Sector Purchase

programme (CSPP), in conjunction with a cut in key interest rates, the

announcement of a new series of targeted longer-term refinancing operations

(TLTROs), and an increase in monthly asset purchases.

     "CSPP creates spare capacity in banks' balance sheets that they can use to

lend to bank-dependent firms, mainly small and medium-sized enterprises (SMEs),"

the paper said.

     By increasing the net issuance of debt securities, CSSP triggered "a shift

in bank loan supply in favour of firms that do not have access to bond-based

financing."

     Notably, "credit access improved relatively more for firms borrowing from

banks relatively more exposed to CSPP-eligible firms. Unlike in previous

studies, this result applies regardless of bank balance sheet quality as

measured by Tier 1 and NPL ratios," Roberto De Santis, a principal economist at

the ECB, and Frank Betz of the European Investment Bank, wrote.

     The ECB is currently examining the parameters of a possible future

bond-buying programme, amid questions over the degree of headroom still

available to make fresh sovereign bond purchases.

     Since March 2016, the authors note, financing conditions for euro area

firms have improved considerably, while corporate bond spreads tightened and

corporate bond issuance increased with large corporations "certainly benefiting

from the policy."

     Although published by the ECB as part of its Working Paper series, the

conclusions drawn by the study's authors are their own, and do not represent the

view of the central bank.

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$X$$$,M$$EC$]