Indeed, banks have responded to the targeting incentives embedded in the new facility by reducing lending rates and increasing their loan supply. The asset purchase programme, together with a negative rate on excess reserves, quickens the pace at which banks and other lenders are resuming providing credit to the economy at more favourable conditions.
Lower term spreads on public sector securities encourage a shift in the composition of banks’ portfolios towards other types of exposure with a higher risk-adjusted return, which primarily includes loans. The negative interest rate on reserves discourages liquidity hoarding and speeds up the process of asset reallocation.