The Impact of Central Bank Liquidity Support on Banks’ Balance Sheets

43 Pages Posted: 6 Nov 2019

See all articles by Leo de Haan

Leo de Haan

International Institute of Social Studies of Erasmus University

Sarah Holton

European Central Bank (ECB)

Jan Willem van den End

De Nederlandsche Bank

Date Written: November, 2019

Abstract

We empirically analyse the relationship between longer term central bank liquidity support and banks’ balance sheet ratios, using difference-in-differences panel regressions and propensity score matching on a large sample of banks in the euro area. The research question is whether the liquidity operations, which were introduced to prevent disorderly deleveraging, can also be linked to unintended changes in banks’ funding policies and asset allocations. The results show that unconditional and conditional refinancing operations are associated with different developments on banks’ balance sheets. Unconditional longer-term refinancing operations went together with higher maturity transformation by banks in stressed countries, and also more carry trades, i.e. banks borrowing more while increasing their holdings of government bonds. In contrast, refinancing operations that were conditional on banks’ lending were not associated with such carry trades, highlighting the benefits of conditionality attached to long-term refinancing operations.

Keywords: banking, central bank liquidity, financial intermediation

JEL Classification: E51, G21, G32

Suggested Citation

de Haan, Leo and Holton, Sarah and van den End, Jan Willem, The Impact of Central Bank Liquidity Support on Banks’ Balance Sheets (November, 2019). ECB Working Paper No. 2326, Available at SSRN: https://ssrn.com/abstract=3480398

Leo De Haan (Contact Author)

International Institute of Social Studies of Erasmus University ( email )

Kortenaerkade 12, 2518 AX
The Hague, South Holland 2518 AX
Netherlands

Sarah Holton

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jan Willem van den End

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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