What Do Almost 20 Years of Micro Data and Two Crises Say About the Relationship Between Central Bank and Interbank Market Liquidity? Evidence From Italy

59 Pages Posted: 12 Nov 2019

Date Written: November 4, 2019

Abstract

This paper studies the mutual interplay between central bank (CB) liquidity provisions and interbank market (IM) liquidity exchanges, exploring whether the relationship changes in the event of IM impairments and massive CB liquidity injections during global and sovereign crises. The analysis uses a data set containing 17 years of monthly bank-by-bank and counterparty-by-counterparty data collated from 1998 to 2015 in Italy. The results show the existence of complementarity. Banks receiving CB liquidity redistribute more to other banks. When CB liquidity increases exponentially during crises, some healthy banks specialise in interbank lending. The complementarity helps to offset euro area fragmentation via domestic interbank relationships and to adjust the collateral and maturity profiles of banks' liquidity.

Keywords: liquidity, financial and sovereign crises, central bank intervention, interbank

JEL Classification: G21, E52, C30

Suggested Citation

Affinito, Massimiliano, What Do Almost 20 Years of Micro Data and Two Crises Say About the Relationship Between Central Bank and Interbank Market Liquidity? Evidence From Italy (November 4, 2019). BIS Working Paper No. 821, Available at SSRN: https://ssrn.com/abstract=3485212

Massimiliano Affinito (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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