Can the Provision of Long-Term Liquidity Help to Avoid a Credit Crunch? Evidence from the Eurosystem's LTROs

Andrade, Philippe; Cahn, Christophe; Fraisse, Henri; Mésonnier, Jean‐Stéphane

doi:10.2139/ssrn.2576110

Cited by 40 publications

(34 citation statements)

References 44 publications

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“…In the eurozone, the effect of the ECB interventions during the recent crisis is analyzed in Casiraghi et al (2013), van der Kwaak (2015, Vissing-Jorgensen et al (2015), Crosignani et al (2017), Daetz et al (2016), Alves et al (2016), Andrade et al (2015), and Garcia-Posada and Marchetti (2015). The last four papers also study the effect of the ECB liquidity on bank private credit supply.…”

Section: Supply the Intervention Called The Three-year Long Term Rementioning

confidence: 99%

“…However, disentangling bank solvency and illiquidity is beyond the scope of this paper. 28 The existing papers on the transmission of the LTRO simply use banks' endogenous uptake of ECB liquidity as a source of variation (Andrade et al (2015), Alves et al (2016), Daetz et al (2016), Garcia-Posada and Marchetti (2015)). Compared with these analyses, we better identify the causal effect of central bank liquidity on bank portfolio choice and discuss the transmission to both private credit supply and holdings of securities.…”

Section: Dissecting the Transmission Channelmentioning

confidence: 99%

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The Effect of Central Bank Liquidity Injections on Bank Credit Supply

Carpinelli

Crosignani

2017

FEDS

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We study the effectiveness of central bank liquidity injections in restoring bank credit supply following a wholesale funding dry-up. We combine borrower-level data from the Italian credit registry with bank security-level holdings and analyze the transmission of the European Central Bank three-year Long Term Refinancing Operation. Exploiting a regulatory change that expands eligible collateral, we show that banks more affected by the dry-up use this facility to restore their credit supply, while less affected banks use it to increase their holdings of high-yield government bonds. Unable to switch from affected banks during the dry-up, firms benefit from the intervention.JEL: E50, E58, G21, H63

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Section: Supply the Intervention Called The Three-year Long Term Rementioning

confidence: 99%

Section: Dissecting the Transmission Channelmentioning

confidence: 99%

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

Carpinelli

Crosignani

2017

FEDS

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“…Many papers in this group study liquidity-driven channels. Papers like Carpinelli and Crosignani (2017), Garcia-Posada and Marchetti (2016) or Andrade et al (2015) analyze the effect of the 3-year Longer Term Refinancing Operations (3y-LTROs) that were implemented in the Eurozone in 2011 and 2012 in the wake of the Eurozone sovereign debt crisis to prevent a funding squeeze of the banking sector. Butt et al (2014) focus on banks' deposits as the key pass-through variable of assets sales by the banks' deponents (e.g.…”

Section: Related Literaturementioning

confidence: 99%

“…Kandrac and Schlusche, 2016;Butt, Churm, McMahon, Morotz, and Schanz, 2014;Carpinelli and Crosignani, 2017;Andrade, Cahn, Fraisse, and Mésonnier, 2015). However, little work has been done on a rebalancing that is priceor yield-induced.…”

mentioning

confidence: 99%

Unconventional Monetary Policy, Bank Lending, and Security Holdings: The Yield-Induced Portfolio Rebalancing Channel

Paludkiewicz

2018

SSRN Journal

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Unconventional monetary policy measures in the Eurozone seem to have led to a compression of bond yields that was stronger than the decrease of interest rates on newly issued loans charged by banks in Germany. Furthermore, the volume of credit has increased in relation to security holdings of German banks. This paper examines whether the change in the relative price between bonds and credit resulted in a rebalancing of banks between the securities and credit portfolio. ContributionThis paper uses a fully anonymized dataset on banks' security holdings along with bank balance sheets and data from monetary policy implementation. This granular data facilitates to answer the above question. In addition to the announcement and expectation effects of unconventional monetary policy measures on bond yields, the analysis also exploits the reinvestment decisions that banks have to make when facing maturing securities. ResultsResults suggest that banks facing higher reductions of the average yield of their securities portfolio increase their lending to non-financial firms and households more strongly in response. The effect is particularly pronounced for banks that face more reinvestment decision due to a high fraction of maturing assets. Additionally, banks more affected by the unconventional monetary policy induced yield decline decrease their overall security holdings, especially reducing the holdings of securities with the highest drop in yield. My results shed light on the role of banks in the transmission of unconventional monetary policy. Nichttechnische Zusammenfassung AbstractExploiting a granular dataset of banks' security holdings I assess the impact of unconventional monetary policy on bank lending and security holdings. Using a difference-in-differences regression setup and holding the security composition of each bank constant at its level in January 2014, well in advance of an anticipation of the ECB's asset purchase program (APP), this paper provides evidence for the presence of a yield-induced portfolio rebalancing channel: Banks experiencing a higher average yield decline of their securities portfolio -induced by unconventional expansionary monetary policy -increase their real sector lending more strongly relative to other banks. The effect is stronger for banks facing many reinvestment decisions. Moreover, I find that banks with a higher average yield decline reduce their overall investments in securities more intensely, especially in those securities that had larger valuation gains. These novel findings suggest that banks target a specific yield level and shift their investments from the securities to the (higheryielding) credit portfolio. Making use of data on bank-specific TLTRO uptakes, my results do not seem to be driven by alternative, liquidity-driven transmission channels.

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“…7 Second, our findings on the effect of the LTRO on portfolio choice relate to the vast literature on the transmission of monetary policy through the financial sector. 8 The transmission of ECB lender of last resort policies to private lending through the financial sector is studied by, among others, Andrade et al (2015) and Carpinelli and Crosignani (2015), who find a positive effect on lending by French and Italian banks, respectively. On a less positive note, van der Kwaak (2015) and Corbisiero (2016) build general equilibrium models and find that the effect on output is essentially zero.…”

Section: Introductionmentioning

confidence: 99%

The (Unintended?) Consequences of the Largest Liquidity Injection Ever

Crosignani

Faria-e-Castro²,

Fonseca³

2017

FEDS

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We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank's three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase shortterm domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance is consistent with a strategic reaction of the debt agency to the observed yield curve steepening.JEL: E58, G21, G28, H63

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Can the Provision of Long-Term Liquidity Help to Avoid a Credit Crunch? Evidence from the Eurosystem's LTROs

Cited by 40 publications

References 44 publications

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

Unconventional Monetary Policy, Bank Lending, and Security Holdings: The Yield-Induced Portfolio Rebalancing Channel

The (Unintended?) Consequences of the Largest Liquidity Injection Ever

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