Is the ECB’s conventional monetary policy state-dependent? An event study approach

We investigate the impact of ECB conventional (CMP) on national banking indices of 10 Eurozone countries and a Eurozone-wide banking index using the event study technique. We find that announcements of unexpected increases in interest rates benefit French, German, Greek and Italian banks when interest rates are low, while in other periods, the effect is muted. A plausible explanation is that bank profits are squeezed when interest rates are low because banks are reluctant to push deposit rates to zero. Our results are robust to potentially confounding events related to unconventional monetary policy announcements, volatility clustering and volatility expectations.