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Banks' trading after the Lehman crisis: The role of unconventional monetary policy

Natalia Podlich, Isabel Schnabel () and Johannes Tischer

No 19/2017, Discussion Papers from Deutsche Bundesbank

Abstract: Based on a detailed trade-level dataset, we analyze the proprietary trading behavior of German banks in the months directly preceding and following the Lehman collapse in September 2008. The default of Lehman Brothers was a shock to the German banking system that was both unexpected and exogenous. We examine banks' immediate reactions as well as their responses to unconventional monetary policy measures introduced shortly after the event - the introduction of full allotment and the change in eligibility criteria for collateral in central bank refinancing operations. Our results show that market liquidity tightened after the Lehman collapse but there is no evidence of fire sales in the German banking sector. Instead, we observe a broad-based flight to liquidity. The European Central Bank's unconventional monetary policy had a strong impact on banks' trading behavior by inducing shifts towards eligible securities and reducing pressure on market liquidity. This suggests that the ECB's measures contributed to stabilizing the financial system after the Lehman collapse.

Keywords: proprietary trading; fire sales; flight to liquidity; Lehman crisis; market liquidity; unconventional monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E50 G01 G11 G21 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-mac and nep-mon
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Working Paper: Banks' Trading After the Lehman Crisis - The Role of Unconventional Monetary Policy (2018) Downloads
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