The design and transmission of central bank liquidity provisions

Carpinelli, Luisa; Crosignani, Matteo

doi:10.1016/j.jfineco.2020.06.025

Cited by 64 publications

(22 citation statements)

References 52 publications

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“…Moreover, banks are often not rewarded for a balanced sovereign portfolio as rating agencies tend not to rate them above their sovereign in any case (Bilbiie et al, 2020). Several papers have also shown that particular monetary policy interventions might incentivize banks in some euro area countries to hold more domestic public debt (for example Acharya and Steffen, 2015;Carpinelli and Crosignani, forthcoming;Hristov et al, forthcoming), e.g. by reinforcing the tendency towards gambling for resurrection (Drechsler et al, 2016).…”

Section: Related Literaturementioning

confidence: 99%

Macroprudential Policy and the Sovereign-Bank Nexus in the Euro Area

2021

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Research questionEuro area (EA) countries are currently employing a range of macroprudential policies. Among these policies are capital-based regulatory measures like the Countercyclical Capital Buffer. These policies are supposed to increase the resilience of banks. However, scholars and policy makers alike have suspected that tightenings of such measures might have the unintended consequence of incentivizing banks to increase their exposure to domestic government debt, thus strengthening the ''sovereign-bank nexus''. A frequently emphasized reason is the favourable regulatory treatment of government bonds, which receive zero risk weights in the calculation of regulatory requirements and buffers. In this paper, we investigate whether capital-based macroprudential policies in the EA indeed affect banks' holdings of domestic government bonds, and consequently, the sovereign-bank nexus. ContributionOur main contribution is to explore the effects of changes in macroprudential policy on the sovereignbank nexus from an explicitly macroeconomic perspective. This contrasts to the existing studies conducting purely microeconometric analyses. Furthermore, different from those studies, we do not focus on a particular episode or macroprudential intervention but rather look at the average effects of various macroprudential measures in the EA over the period 2005-2018. Results and policy implicationsWe show that a tightening in capital-based macroprudential policy induces an increase in banks' holdings of domestic government debt in the periphery of the EA. In contrast, the bank nexus weakens in the EA core countries. Several theoretical contributions provide rationales for this dichotomous behaviour across the two country groups, the main driving force being the different capitalization or resilience of banks in the core and periphery. Our results are highly robust to changes in the model specification, sample and macroprudential index used. Nichttechnische Zusammenfassung FragestellungGegenwärtig wenden die Mitgliedsländer des Euroraums eine Reihe makroprudenzieller Maßnahmen an. Dazu zählen kapitalbasierte Regulierungsmaßnahmen (wie etwa der antizyklische Kapitalpuffer). Diese Maßnahmen sollen die Widerstandskraft des Bankensystems stärken. Allerdings wird in der Literatur vermutet, dass Verschärfungen dieser Maßnahmen einen Anstieg der von den Banken gehaltenen inländischen Staatsanleihen zur Folge haben, wodurch sich die Verbindung von Staaten und Banken verstärkt. Als ein wichtiger Grund wird dabei die Belegung von Staatschuldtiteln mit einem Risikogewicht von Null bei der Ermittlung regulatorischer Kapitalanforderungen angesehen. In diesem Artikel untersuchen wir, inwiefern die Anpassung kapitalbasierter makroprudenzieller Instrumente die Banken im Euroraum zu einer Ausweitung ihrer Bestände inländischer Staatspapiere veranlasst und somit diese Verbindung intensiviert. Beitrag Unser Hauptbeitrag liegt in der rein makroökonomischen Perspektive, die wir bei der Analyse der Effekte der makroprudenziellen Interventionen au...

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Section: Related Literaturementioning

confidence: 99%

Macroprudential Policy and the Sovereign-Bank Nexus in the Euro Area

2021

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“…First, it connects to the growing literature on the European sovereign debt crisis. Recent work investigates the real effects of unconventional monetary policy by the ECB (e.g., Daetz et al., 2016; Acharya et al., 2019, 2020; Carpinelli & Crosignani, 2020), and the effects of these policies on sovereign risk (e.g., Eser & Schwaab, 2013; Szczerbowicz, 2015; Krishnamurthy et al., 2018). In particular, our fire‐sale risk channel is related to the residual component of sovereign bond yields not explained by sovereign default risk or redenomination risk, and referred to as a domestic segmentation channel in Krishnamurthy et al.…”

Section: Related Literaturementioning

confidence: 99%

Lender of last resort, buyer of last resort, and a fear of fire sales in the sovereign bond market*

Acharya¹,

Pierret

Steffen

2021

Financial Market

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We document the mechanism through which the risk of fire sales in the sovereign bond market contributed to the effectiveness of two major central bank interventions designed to restore financial stability during the European sovereign debt crisis. As a lender of last resort via the long‐term refinancing operations (LTROs), the European Central Bank (ECB) improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire‐sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB's announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire‐sale risk in the sovereign bond market.

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“…If no frictions exist, the maturity in refinancing operations plays no role as banks can rollover short-term loans further. However, the maturity becomes important when uncertainty about the future central bank accommodation emerges, the issue referred to as the maturity extension channel (Carpinelli and Crosignani, 2021). That is, the banks could be exposed to rollover risk in the face of possible tightening of the short-term liquidity channel, leading to lower credit supply.…”

Section: Longer-term Refinancing Operationsmentioning

confidence: 99%

The Effects of the ECB's Pandemic-Related Monetary Policy Measures

Nelimarkka

Laine

2021

SSRN Journal

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The design and transmission of central bank liquidity provisions

Cited by 64 publications

References 52 publications

Macroprudential Policy and the Sovereign-Bank Nexus in the Euro Area

Macroprudential Policy and the Sovereign-Bank Nexus in the Euro Area

Lender of last resort, buyer of last resort, and a fear of fire sales in the sovereign bond market*

The Effects of the ECB's Pandemic-Related Monetary Policy Measures

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