Banks' Trading after the Lehman Crisis: The Role of Unconventional Monetary Policy

Posted: 14 Jul 2017

See all articles by Natalia Podlich

Natalia Podlich

Deutsche Bundesbank

Isabel Schnabel

University of Bonn - Institute for Financial Economics and Statistics; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Johannes Tischer

Johannes Gutenberg University Mainz

Date Written: 2017

Abstract

Based on a detailed trade-level dataset, we analyze the proprietary trading behavior of German banks in the months directly preceding and following the Lehman collapse in September 2008. The default of Lehman Brothers was a shock to the German banking system that was both unexpected and exogenous. We examine banks' immediate reactions as well as their responses to unconventional monetary policy measures introduced shortly after the event - the introduction of full allotment and the change in eligibility criteria for collateral in central bank refinancing operations. Our results show that market liquidity tightened after the Lehman collapse but there is no evidence of fire sales in the German banking sector. Instead, we observe a broad-based flight to liquidity. The European Central Bank's unconventional monetary policy had a strong impact on banks' trading behavior by inducing shifts towards eligible securities and reducing pressure on market liquidity. This suggests that the ECB's measures contributed to stabilizing the financial system after the Lehman collapse.

Keywords: proprietary trading, fire sales, flight to liquidity, Lehman crisis, market liquidity, unconventional monetary policy

JEL Classification: E44, E50, G01, G11, G21

Suggested Citation

Podlich, Natalia and Schnabel, Isabel and Tischer, Johannes, Banks' Trading after the Lehman Crisis: The Role of Unconventional Monetary Policy (2017). Bundesbank Discussion Paper No. 19/2017. Available at SSRN: https://ssrn.com/abstract=3002414

Natalia Podlich (Contact Author)

Deutsche Bundesbank ( email )

PO Box 10 06 02
D60006 Frankfurt
Germany

Isabel Schnabel

University of Bonn - Institute for Financial Economics and Statistics ( email )

Adenauerallee 24-42
Bonn, 53113
Germany

HOME PAGE: http://www.finance.uni-bonn.de/schnabel

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany
+49-228-9141665 (Phone)
+49-228-9141621 (Fax)

HOME PAGE: http://www.coll.mpg.de/team/page/isabel_schnabel

Johannes Tischer

Johannes Gutenberg University Mainz ( email )

Saarstrasse 21
Mainz, D-55099
Germany

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