66 Pages Posted: 12 Apr 2016 Last revised: 12 Apr 2017
Date Written: April 11, 2017
We document channels of monetary policy transmission to banks following two significant interventions of the European Central Bank (ECB) during the sovereign debt crisis. As a lender of last resort via the long-term refinancing operations (LTROs), the ECB improved the collateral value of short-term sovereign bonds of peripheral countries. Banks in the peripheral countries became excessively dependent on public funds and increased their exposure to domestic debt. An elevated concentration of peripheral sovereign bonds in the portfolios of risky banks increased fire sale risk, increasing the riskiness of both banks and sovereign bonds. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors to the sovereign bond market, reduced concentration and fire sale risk, and permanently improved solvency conditions for eurozone banks.
Keywords: Monetary policy, fire sale risk, bank risk, sovereign debt, ECB
JEL Classification: G01, G21, G28
Suggested Citation: Suggested Citation
Acharya, Viral V. and Pierret, Diane and Steffen, Sascha, Lender of Last Resort versus Buyer of Last Resort – Evidence from the European Sovereign Debt Crisis (April 11, 2017). ZEW - Centre for European Economic Research Discussion Paper No. 16-019. Available at SSRN: https://ssrn.com/abstract=2762265 or http://dx.doi.org/10.2139/ssrn.2762265