Lender of last resort, buyer of last resort, and a fear of fire sales in the sovereign bond market*

Viral Acharya, Diane Pierret and Sascha Steffen

Financial Markets, Institutions & Instruments, 2021, vol. 30, issue 4, 87-112

Abstract: We document the mechanism through which the risk of fire sales in the sovereign bond market contributed to the effectiveness of two major central bank interventions designed to restore financial stability during the European sovereign debt crisis. As a lender of last resort via the long‐term refinancing operations (LTROs), the European Central Bank (ECB) improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire‐sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB's announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire‐sale risk in the sovereign bond market.

Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://doi.org/10.1111/fmii.12143

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:finmar:v:30:y:2021:i:4:p:87-112

Access Statistics for this article

More articles in Financial Markets, Institutions & Instruments from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().