A public-private partnership? Central bank funding and credit supply

Matthieu Chavaz, David Elliott and Win Monroe
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Matthieu Chavaz: Bank for International Settlements
David Elliott: Bank of England
Win Monroe: Copenhagen Business School

No 1161, Bank of England Staff Working Paper series from Bank of England

Abstract: We exploit the surprise announcement and subsequent amendment of a central bank funding scheme to test how public liquidity provision affects credit market outcomes. Contrary to the notion that public liquidity is primarily a substitute for private liquidity, banks that are more exposed to stress in private wholesale funding markets use less central bank funding. We rationalise this pattern by establishing an 'equilibrium channel' of public liquidity. The mere availability of central bank funding reduces the cost of private wholesale funding. This stimulates lending by banks exposed to wholesale funding, regardless of whether they actually use the central bank funding. Using a surprise amendment to the design of the scheme, we show that the 'strings attached' to central bank funding help to explain why it is an imperfect substitute for private funding.

Keywords: Central bank funding; mortgage lending; bank funding risk (search for similar items in EconPapers)
JEL-codes: E52 E58 G21 (search for similar items in EconPapers)
Pages: 45
Date: 2025-12-05
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:023283

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