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

Abstract

We exploit the Eurosystem’s longer-term refinancing operations (LTROs) of 2011–2012 to assess whether a large provision of central bank liquidity to banks during a financial crisis has a positive impact on banks’ credit supply to firms. We control for credit demand by examining firms that borrow from several banks, in addition to controlling for confounding factors at the level of banks. We find that the LTROs enhanced loan supply: according to our baseline estimate, banks borrowing 1 billion euros from the facility increased their loan supply by 186 million euros over one year. We also find that the transmission mostly took place with the first operation of December 2011, in which banks that were more capital constrained bid more. Moreover, we show that the opportunity to substitute long-term central bank liquidity for short-term liquidity enhanced this transmission. Lastly, the operations benefited larger borrowers more and did not lead banks to increase their lending to riskier firms.

Unconventional economic policies and sentiment: An international assessment

“…The objective is to implement long‐term refinancing operations (LTROs), providing banks with liquidity at 3‐year maturity, reducing the reserve ratio (from 2% to 1%) and in imposing negative deposit facility interest rates to European banks (Borio & Zabia, ). The main objective is to improve the credit channel (Peersman, ; Andrade, Cahn, & Mésonnier, ) which would ultimately enhance real consumption, investment and economic growth. CE does not involve money supply fluctuations in the medium term because the banks' repayments entail sterilisation operations.…”

ECB Policies Involving Government Bond Purchases: Impact and Channels*

“…The effect is again small in economic terms and relative to the amount of Spanish bank borrowing in the 3-year LTROs which was about 9% of the value of bank balance sheets across banks in their sample. Andrade, Cahn, Fraisse, and Mesonnier (2015) focus on France and find that the EUR 153 billion total LTRO take-up for the banks in their sample let them to increase credit supply to the private sector by about 15 billion, again suggesting that only a small fraction of LTRO borrowings were lent out. Focusing on Portugal, Crosignani, Fariae-Castro and Fonseca (2015) show that net borrowing by Portuguese banks from the ECB went up substantially at the second 3-year LTRO allotment and that there is a strong positive relation in the cross-section of banks between bank purchases of Portuguese government bonds leading up to this allotment and the amount borrowed at the allotment.…”

The Provision of Long-Term Credit and Firm Growth in Developing Countries

“…Nevertheless, the performance of firms has been noticed by several scholars and analysts in different developing nations and regions, as there are a significant amount of firms and organizations that are performing successfully (Léon, 2020). Andrade, Cahn, Fraisse, and Mésonnier (2019) recommended that, in order to address any gaps or shortcomings in a firm's performance (FP), some contextual factors and variables like LTC and STC, which affect the quality of a firm, need to be identified and evaluated in detail. Research on the impact of the growth of employment (GoE) on FP is limited, so studies needs to be conducted on firms and businesses in different developing regions and countries (Leon, 2019).…”