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Did the Eurosystem’s LTROs of 2011 and 2012 help to avert a credit crunch in the euro area?

Philippe Andrade (), Jean-Stéphane Mésonnier (), Christophe Cahn () and Henri Fraisse

Rue de la Banque, 2015, issue 10

Abstract: The two 3-year longer-term refinancing operations (LTROs) implemented by the Eurosystem in December 2011 and February 2012 resulted in a massive positive liquidity shock to the euro area’s banking system. In this research, we exploit a rich dataset of bilateral bank-firm credit exposures in France to analyse the effects of this large provision of central bank liquidity to banks on the credit supply to firms. We find that (1) the LTROs did indeed have a positive impact on loan supply in France; (2) the transmission mostly took place with the first round of the LTROs, in which the participating banks tended to be those facing greater financial constraints; (3) the opportunity to substitute long-term central bank borrowing for short-term borrowing was instrumental in this transmission; (4) the increase in loan supply was of greatest benefit to the largest corporate borrowers. Lastly, our evidence suggests that the LTROs did not encourage banks to evergreen bad loans to ailing firms.

Date: 2015
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