Can the Provision of Long-Term Liquidity Help to Avoid a Credit Crunch? Evidence from the Eurosystem's LTRO

52 Pages Posted: 10 Mar 2015 Last revised: 3 Jan 2018

Philippe Andrade

Banque de France

Christophe Cahn

Banque de France - Direction des Entreprises

Henri Fraisse

Banque de France - Autorité de contrôle Prudentiel

Jean-Stéphane Mésonnier

Banque de France -DGEI-DEMFI-RECFIN

Date Written: December 30, 2017

Abstract

We exploit the Eurosystem’s longer-term refinancing operations (LTROs) of 2011–2012 to assess whether a large provision of central bank liquidity to banks during a financial crisis has a positive impact on banks’ credit supply to firms. We control for credit demand by examining firms that borrow from several banks, in addition to controlling for confounding factors at the level of banks. We find that the LTROs enhanced loan supply: according to our baseline estimate, banks borrowing 1 billion euros from the facility increased their loan supply by 186 million euros over one year. We also find that the transmission mostly took place with the first operation of December 2011, in which banks that were more capital constrained bid more. Moreover, we show that the opportunity to substitute long-term central bank liquidity for short-term liquidity enhanced this transmission. Lastly, the operations benefited larger borrowers more and did not lead banks to increase their lending to riskier firms.

Keywords: unconventional monetary policy, central bank liquidity, bank lending channel, credit supply, euro crisis

JEL Classification: E44, E51, E52, G01, G21

Suggested Citation

Andrade, Philippe and Cahn, Christophe and Fraisse, Henri and Mésonnier, Jean-Stéphane, Can the Provision of Long-Term Liquidity Help to Avoid a Credit Crunch? Evidence from the Eurosystem's LTRO (December 30, 2017). (previous version: Banque de France Working Paper No. 540). Available at SSRN: https://ssrn.com/abstract=2576110 or http://dx.doi.org/10.2139/ssrn.2576110

Philippe Andrade (Contact Author)

Banque de France ( email )

Paris
France

Christophe Cahn

Banque de France - Direction des Entreprises ( email )

39 rue Croix des Petits Champs
Paris Cedex 01 75049
France

Henri Fraisse

Banque de France - Autorité de contrôle Prudentiel ( email )

61, rue Taitbout
Paris, 75436
France

Jean-Stéphane Mésonnier

Banque de France -DGEI-DEMFI-RECFIN ( email )

Paris
France
+33 (0)1 42 92 91 63 (Phone)

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