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Bank stability and refinancing operations during the crisis: Which way causality?

Ivo Arnold () and Beau Soederhuizen

Research in International Business and Finance, 2018, vol. 43, issue C, 79-89

Abstract: This paper explores the causality between refinancing operations of the ECB and the stability of the European banking sector during the recent crisis. We hypothesize that causality may run both ways. The ECB’s role in safeguarding the stability of the financial system suggests that refinancing operations may contribute to greater stability. Alternatively, instability in the banking sector may stimulate banks to tap liquidity at the ECB. Using country-level data on refinancing operations and bank CDS rates, we find a positive relationship between bank instability and liquidity uptake. High bank CDS rates are significantly related to the decision to tap liquidity, yet the liquidity uptake itself does little to bring these rates down quickly.

Keywords: ECB refinancing operations; Unconventional monetary policy; Credit default swaps; Bank stability; Euro crisis (search for similar items in EconPapers)
JEL-codes: C33 E52 E58 G01 G13 G21 G15 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.ribaf.2017.07.122

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