The Effect of Central Bank Liquidity Injections on Bank Credit Supply
56 Pages Posted: 9 Mar 2017 Last revised: 16 Jan 2018
Date Written: January 15, 2018
We analyze central bank provisions of collateralized liquidity to banks following a wholesale funding dry-up. Combining rm-level data from the Italian loan credit registry with supervisory data on security-level holdings, we examine the European Central Bank’s three-year Long Term Refinancing Operations. We find that (i) long-term, but not short-term, central bank liquidity helped banks hit by the dry-up restore their credit supply to firms; (ii) banks used most liquidity to buy government bonds; and (iii) a government guarantee, by granting banks hit by the dry-up access to central bank liquidity, was necessary for the transmission of liquidity to firms.
Keywords: Central Bank Liquidity, Wholesale Funding, Bank Credit, Government Bonds, Government Guarantees
JEL Classification: E50, E58, G21, H63
Suggested Citation: Suggested Citation