Systemic Risk and Monetary Policy: The Haircut Gap Channel of the Lender of Last Resort

Luc Laeven, Martina Jasova, Caterina Mendicino, Peydró, José-Luis and Dominik Supera
Authors registered in the RePEc Author Service: Jose-Luis Peydro

No 16240, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show that lender of the last resort (LOLR) policy contributes to higher bank interconnectedness and associated systemic risk. Using novel micro-level data, we analyze the haircut gap channel of LOLR--the difference between the private market and central bank haircuts. LOLR increases interconnectedness by incentivizing banks to pledge higher haircut gap bonds, especially issued by similar banks and by systemically important banks. LOLR also exacerbates cross-pledging of bank bonds. Higher haircut gaps only incentivize banks, not other intermediaries without LOLR access, to increase bank bond holdings. Finally, LOLR revives bank bond issuance associated with higher haircut gaps.

Keywords: Central bank liquidity; Haircuts; Collateral; Bank risk concentration; Systemic risk (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 F30 G01 G21 (search for similar items in EconPapers)
Date: 2021-06
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Journal Article: Systemic Risk and Monetary Policy: The Haircut Gap Channel of the Lender of Last Resort (2024)
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