First, the APP was launched against the backdrop of the completion of our Comprehensive Assessment of bank balance sheets, which ensured that banks were in the strongest possible position to transmit the boost to credit supply. Second, and even more fundamentally, banks’ lending processes react to macroeconomic conditions in a feedback loop. For much of the crisis, that loop was pernicious.
But our measures have been able to turn it positive. When the economy was weak, banks tended to increase lending rates because they feared that the probability of default on their loans would rise. Those higher rates meant good credit demand fell and the economy worsened further.