Stabilising Virtues of Central Banks: (Re)Matching Bank Liquidity

19 Pages Posted: 8 Mar 2018

See all articles by Vincent Legroux

Vincent Legroux

Banque de France

Imene Rahmouni-Rousseau

Banque de France

Urszula Szczerbowicz

Banque de France

Natacha Valla

European Union - European Investment Bank; European Central Bank (ECB); Banque de France

Date Written: March 2018

Abstract

The liquidity of financial system plays a central role in systemic crises. In this paper, we show that the ECB haircut policies provided an important liquidity support to distressed financial institutions during the euro area sovereign debt turmoil. Using novel, micro data on the pool of collateral eligible to ECB open market operations, we construct a “public” liquidity mismatch indicator (LMI) for the French aggregate banking sector based on the ECB haircuts. We then compare it to the “private” LMI based on the haircuts in private repo markets in a spirit of Bai et al. (2018). The difference between the two indicators represents a new measure of the ECB liquidity support. Our results suggest that the ECB haircut policies have indeed helped French banks to reduce the liquidity mismatch.

Keywords: Bank Liquidity, Liquidity Mismatch, Monetary Policy, Central Bank, Haircuts, Collateral Framework

JEL Classification: E58, G21, G28

Suggested Citation

Legroux, Vincent and Rahmouni-Rousseau, Imene and Szczerbowicz, Urszula and Valla, Natacha, Stabilising Virtues of Central Banks: (Re)Matching Bank Liquidity (March 2018). Banque de France Working Paper No. 667, Available at SSRN: https://ssrn.com/abstract=3136388 or http://dx.doi.org/10.2139/ssrn.3136388

Imene Rahmouni-Rousseau

Banque de France ( email )

Paris
France

Urszula Szczerbowicz

Banque de France ( email )

Paris
France

Natacha Valla

European Union - European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 13440 (Phone)

Banque de France ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France
+33 1 42922756 (Phone)
+33 1 42926296 (Fax)

HOME PAGE: http://www.iue.it/Personal/Researchers/valla/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
20
Abstract Views
467
PlumX Metrics