Download this Paper Open PDF in Browser

Lending-of-Last-Resort Is as Lending-of-Last-Resort Does: Central Bank Liquidity Provision and Interbank Market Functioning in the Euro Area

58 Pages Posted: 23 Sep 2015 Last revised: 24 May 2016

Carlos Garcia-de-Andoain

European Central Bank (ECB)

Florian Heider

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Marie Hoerova

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Simone Manganelli

European Central Bank (ECB)

Multiple version iconThere are 3 versions of this paper

Date Written: December 15, 2015

Abstract

This paper investigates the impact of ample liquidity provision by the European Central Bank on the functioning of the overnight unsecured interbank market from 2008 to 2014. We use novel data on interbank transactions derived from TARGET2, the main euro area payment system. To identify exogenous shocks to central bank liquidity, we exploit the timing of ECB liquidity operations and use a simple structural vector auto-regression framework. We argue that the ECB acted as a de-facto lender-of-last-resort to the euro area banking system and identify two main effects of central bank liquidity provision on interbank markets. First, central bank liquidity replaces the demand for liquidity in the interbank market, especially during the financial crisis (2008-2010). Second, it increases the supply of liquidity in the interbank market in stressed countries (Greece, Italy and Spain) during the sovereign debt crisis (2011-2013).

Keywords: Lender-of-last-resort, Interbank Markets, Financial Crisis, Sovereign Debt Crisis, Central Bank Policy

JEL Classification: E58, F36, G01, G21

Suggested Citation

Garcia-de-Andoain, Carlos and Heider, Florian and Hoerova, Marie and Manganelli , Simone, Lending-of-Last-Resort Is as Lending-of-Last-Resort Does: Central Bank Liquidity Provision and Interbank Market Functioning in the Euro Area (December 15, 2015). Journal of Financial Intermediation, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2663484 or http://dx.doi.org/10.2139/ssrn.2663484

Carlos Garcia-de-Andoain

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Florian Heider

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

HOME PAGE: http://https://sites.google.com/site/florianheider2/

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Marie Hoerova (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Simone Manganelli

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Frankfurt am Main, 60311
Germany

HOME PAGE: http://www.simonemanganelli.org

Paper statistics

Downloads
161
Rank
127,377
Abstract Views
816