The Effect of Central Bank Liquidity Injections on Bank Credit Supply

Abstract

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

The Impact of the ECB’s Targeted Long-Term Refinancing Operations on Banks’ Lending Policies: The Role of Competition

“…The effect was greater for illiquid banks and it was driven by credit to SMEs, as there was no impact on loans to large firms. Carpinelli and Crosignani (2017), for the case of Italy, show that banks that experienced a wholesale market dry-up before the intervention reduced their credit supply during the period of funding stress and restored their credit supply once the central bank injected liquidity into the system, partly due to a regulatory change that expanded eligible collateral. 7…”

Employment Effects of Unconventional Monetary Policy: Evidence from QE

“…There are also several papers that investigate the effects of unconventional monetary policy in Europe (see, e.g.,Acharya et al, 2016;Carpinelli and Crosignani, 2017;Crosignani et al, 2018;Cahn et al, 2018;Cumming, 2018).…”

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

“…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.…”

“…In the spirit of Bagehot (1873) in crisis times the central bank can act as a lender of last resort and provide liquidity directly to banks to prevent a credit contraction (see e.g. Carpinelli and Crosignani, 2017). Alternatively, liquidity might be generated by the sale of securities to the central bank either by the banks directly (see e.g.…”

“…There is a growing body of empirical literature that examines the liquidity-driven rebalancing motive by banks (see e.g. 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.…”