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Liquidity coverage ratios and monetary policy credit in the time of Corona

Viktoriya Gocheva, Yvo Mudde and Jens Tapking

No 2668, Working Paper Series from European Central Bank

Abstract: When a bank receives credit from the central bank, its Liquidity Coverage Ratio (LCR) changes. In most cases, the LCR increases. We investigate how this LCR boost from central bank credit affects banks’ behaviour, looking at the euro area during the Corona year 2020. Our theoretical and empirical analyses suggest that banks that get strong LCR boosts from central bank credit tend to take actions that reduce their LCRs. In this sense, banks consume their LCR boosts. In terms of policy conclusions, our analysis suggests that central bank credit operations can provide strong incentives for banks to take actions that reduce their LCRs. Such actions, which could include the provision of additional credit and a shortening of the maturity structure of the liabilities of the banks, plausibly have an impact on the real economy. As such, our analysis reveals what may be called a “LCR channel” of monetary policy transmission. JEL Classification: E52, E58, G28

Keywords: central bank credit operations; Corona pandemic; Liquidity Coverage Ratio; monetary policy transmission (search for similar items in EconPapers)
Date: 2022-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dem, nep-eec, nep-mac and nep-mon
Note: 428113
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