Does the Eurosystem's lender of last resort facility has a structurally di fferent option value across banks?

Patrick Weber

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: Using a unique data set, I study whether structural bank characteristics can help to explain a bank's propensity to take recourse to the ECB's marginal lending facility (MLF). My key finding is that besides structural measures capturing a bank's business model, indicators for its liquidity risk management have a highly significant predictive power for a bank's access to the lender-of-the-last-resort (LLR) facility. A bank with volatile reserve holdings, a lower average reserve fulfillment and a more aggressive bidding behavior in the main refinancing operations, is significantly more likely to revert to the MLF. These results suggest that the option value of having access to the ECB's LLR varies significantly across banks. Thus (i) a uniform Marginal Lending rate undermines market efficiency and (ii) structural bank characteristics could be used to adequately adjust the pricing of the MLF to bank specific structural liquidity risks.

JEL-codes: E58 G01 G21 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:113123

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