Risk endogeneity at the lender/investor-of-last-resort
Diego Caballero (),
Andr e Lucas (),
Bernd Schwaab () and
Xin Zhang ()
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Diego Caballero: European Central Bank
Andr e Lucas: Vrije Universiteit Amsterdam and Tinbergen Institute
Bernd Schwaab: European Central Bank
Xin Zhang: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
No 382, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)
To what extent can a central bank influence its own balance sheet credit risks during a financial crisis through unconventional monetary policy operations? To study this question we develop a risk measurement framework to infer the time-variation in portfolio credit risks at a high (weekly) frequency. Focusing on the Eurosystem's experience during the euro area sovereign debt crisis between 2010 and 2012, we find that the announcement and implementation of unconventional monetary policy operations generated beneficial risk spill-overs across policy portfolios. This caused overall risk to be nonlinear in exposures. In some instances the Eurosystem reduced its overall balance sheet credit risk by doing more, in line with Bagehot's well-known assertion that occasionally "only the brave plan is the safe plan."
Keywords: lender-of-last-resort; unconventional monetary policy; portfolio credit risk; longer-term operational framework; central bank communication. (search for similar items in EconPapers)
JEL-codes: C33 G21 (search for similar items in EconPapers)
Pages: 43 pages
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-eec and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0382
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