EconPapers    
Economics at your fingertips  
 

The (Unintended?) Consequences of the Largest Liquidity Injection Ever

Matteo Crosignani (), Miguel Faria-e-Castro and Luís Fonseca

No 2017-39, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The design of lender-of-last-resort interventions can exacerbate the bank-sovereign nexus. During sovereign crises, central bank provision of long-term liquidity incentivizes banks to purchase high yield eligible collateral securities matching the maturity of the central bank loans. Using unique security level data, we find that the European Central Bank’s 3-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds, equivalent to 10.6% of amounts outstanding, and pledge them to obtain central bank liquidity. The steepening of Eurozone peripheral sovereign yield curves right after the policy announcement is consistent with the equilibrium effects of this “collateral trade.”

Keywords: Lender of Last Resort; Bank-Sovereign Nexus; Collateral; Sovereign Debt; Eurozone Crisis (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-eec, nep-mac and nep-mon
Date: 2017-11-01, Revised 2019-01-30
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15) Track citations by RSS feed

Downloads: (external link)
https://files.stlouisfed.org/files/htdocs/wp/2017/2017-039.pdf Full text (application/pdf)
https://doi.org/10.20955/wp.2017.039 https://doi.org/10.20955/wp.2017.039 (text/html)

Related works:
Working Paper: The (Unintended?) Consequences of the Largest Liquidity Injection Ever (2017) Downloads
Working Paper: The (Unintended?) Consequences of the Largest Liquidity Injection Ever (2016) Downloads
Working Paper: The (unintended?) consequences of the largest liquidity injection ever (2016) Downloads
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:fip:fedlwp:2017-039

Ordering information: This working paper can be ordered from

DOI: 10.20955/wp.2017.039

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Anna Oates ().

 
Page updated 2019-04-17
Handle: RePEc:fip:fedlwp:2017-039