Stabilising virtues of central banks: (Re)matching bank liquidity

Vincent Legroux, Imène Rahmouni-Rousseau, Urszula Szczerbowicz and Natacha Valla

Journal of Banking & Finance, 2022, vol. 134, issue C

Abstract: The liquidity of financial system plays a central role in systemic crises. In this paper, we show that the ECB haircut policies provided an important liquidity support to distressed financial institutions during the euro area sovereign debt turmoil. Using novel, micro data on the pool of collateral eligible to ECB open market operations, we construct a “public” liquidity mismatch indicator (LMI) for the French aggregate banking sector based on the ECB haircuts. We then compare it to the “private” LMI based on the haircuts in private repo markets in the spirit of Bai et al. (2018). The difference between the two indicators represents a new measure of the ECB liquidity support. Our results suggest that the ECB haircut policies indeed helped French banks to reduce the liquidity mismatch. Moreover, higher ECB liquidity support is associated with higher cash and sovereign asset holdings by the French banks as well as with their lower probability of default.

Keywords: Bank liquidity; Liquidity mismatch; Monetary policy; Central bank; Haircuts; Collateral framework (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Stabilising virtues of central banks: (Re)matching bank liquidity (2022)
Working Paper: Stabilising virtues of central banks: (re)matching bank liquidity (2018)
Working Paper: Stabilising virtues of central banks: (re)matching bank liquidity (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:134:y:2022:i:c:s0378426621002740

DOI: 10.1016/j.jbankfin.2021.106323

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