This paper studies the interaction between accounting and prudential rules on bank security holdings and unconventional monetary policy. The empirical setting uses the announcement of the first Public Sector Purchase Programme (PSPP) by the European Central Bank in 2015, and of the following one in 2019 to test the role of prudential rules in shaping the transmission of the PSPP to the bank lending channel.
The estimates show that historical cost accounting, aimed at limiting the adverse effects of financial market volatility on banks' balance sheets, mitigated the transmission of the PSPP to the bank lending channel. Banks more exposed to the PSPP, i.e. those with a greater share of sovereign securities valued at market prices, increased lending at a faster pace than less exposed banks. The overall effect was greater in 2019, when more sovereign securities were valued at market prices than in 2015.
