Large-scale asset purchases by central banks have progressively reduced the slope of the risk-free yield curve, thus lowering banks' net interest margin. This could have induced banks to extend credit to riskier borrowers, increasing concerns about financial stability. This analysis empirically tests this hypothesis by analysing new loans granted to a large sample of firms between 2005 and 2016.
A flattening of the yield curve is associated with a reduction in the share of loans with a higher counterparty risk. Monetary policy measures that aim to reduce long-term rates are, therefore, able to stimulate economic activity without increasing banks' credit risk.
