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4Non-technical summary 5

The eurozone economic activity and banking sector have shown substantial fragility over the last years with remarkable country heterogeneity. Using detailed data on lending conditions and standards, we analyse -along several key dimensions of heterogeneity -how financial fragility has affected the transmission mechanism of the single eurozone monetary policy. The analysis shows that the monetary transmission mechanism is time-varying and influenced by the financial fragility of the sovereigns, banks, firms and households. The impact of monetary policy on aggregate output is stronger during the financial crisis, especially in countries facing increased sovereign financial distress. This amplification mechanism, moreover, operates through the credit channel, both the bank lending and the non-financial borrower balance-sheet channels. Our results suggest that the bank-lending channel has been to a large extent neutralized by the ECB non-standard monetary policy interventions, but the policy framework until the end of 2011 was insufficient to overcome credit availability problems stemming from deteriorated firm net worth and risk conditions, especially for small firms in countries under stress.

Financial structure is an important determinant of the efficiency and stability of financial systems and the channels through which monetary policy is transmitted. We document the substantial differences in the financial systems of the euro area, the UK, the USA, Japan, and non-Japan Asia. The traditional classification of bank-based and market-based systems is shown to be too simplistic. We focus on two particular aspects of financial structure: financial institutions and the housing and mortgage markets. It is shown that institutional investors differ in important ways across the regions considered. One recent change is that Central Banks, particularly those in Asia, have become significant institutional investors. Housing and mortgage markets differ even more. We are still a long way from understanding which kind of financial structure is best.

This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.