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Lender of Last Resort versus Buyer of Last Resort – Evidence from the European Sovereign Debt Crisis

61 Pages Posted: 12 Apr 2016 Last revised: 28 Aug 2017

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Diane Pierret

HEC - University of Lausanne; Swiss Finance Institute

Sascha Steffen

Frankfurt School of Finance & Management

Date Written: August 28, 2017

Abstract

We document channels of monetary policy transmission to banks following two interventions of the European Central Bank (ECB). As a lender of last resort via the long-term refinancing operations (LTROs), the ECB improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire-sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire-sale risk in the sovereign bond market.

Keywords: Bank-sovereign nexus, ECB, fire sales, unconventional monetary policy

JEL Classification: G01, G21, G28

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 (August 28, 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

Viral Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Diane Pierret

HEC - University of Lausanne ( email )

Institute of Banking and Finance
Unil Dorigny, Batiment Extranef
Lausanne, 1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Sonnemannstr. 9 -11
Frankfurt, 60314
Germany

HOME PAGE: http://www.sascha-steffen.de

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