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Risk endogeneity at the lender/investor-of-last-resort

Diego Caballero, Andre Lucas (), Bernd Schwaab and Xin Zhang

No 2225, Working Paper Series from European Central Bank

Abstract: We address the question to what extent a central bank can de-risk its balance sheet by unconventional monetary policy operations. To this end, we propose a novel risk measurement framework to empirically study the time-variation in central bank portfolio credit risks associated with such operations. The framework accommodates a large number of bank and sovereign counterparties, joint tail dependence, skewness, and time-varying dependence parameters. In an application to selected items from the consolidated Eurosystem's weekly balance sheet between 2009 and 2015, we find that unconventional monetary policy operations generated beneficial risk spill-overs across monetary policy operations, causing overall risk to be nonlinear in exposures. Some policy operations reduced rather than increased overall risk. JEL Classification: G21, C33

Keywords: central bank; credit risk; lender-of-last-resort; risk measurement; unconventional monetary policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mon
Date: 2019-01
Note: 2574115
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