The (Unobservable) Value of Central Bank's Refinancing Operations

53 Pages Posted: 14 Oct 2020

See all articles by Ugo Albertazzi

Ugo Albertazzi

ECB -DG Monetary Policy

Lorenzo Burlon

European Central Bank (ECB)

Nicola Pavanini

Tilburg University; Tilburg University - Tilburg University School of Economics and Management; CEPR IO Programme

Tomas Jankauskas

Tilburg University; Tilburg University - Department of Finance

Date Written: October, 2020

Abstract

We quantify the impact that central bank refinancing operations and funding facilities had at reducing the banking sector’s intrinsic fragility in the euro area in 2014-2019. We do so by constructing, estimating and calibrating a micro-structural model of imperfect competition in the banking sector that allows for runs in the form of multiple equilibria, in the spirit of Diamond & Dybvig (1983), banks’ default and contagion, and central bank funding. Our framework incorporates demand and supply for insured and uninsured deposits, and for loans to firms and households, as well as borrowers’ default. The estimation and the calibration are based on confidential granular data for the euro area banking sector, including information on the amount of deposits covered by the deposit guarantee scheme and the borrowing from the European Central Bank (ECB). We document that the quantitative relevance of non-fundamental risk is potentially large in the euro area banking sector, as witnessed by the presence of alternative equilibria with run-type features, but also that central bank interventions exerted a crucial role in containing fundamental as well as non-fundamental risk. Our counterfactuals show that 1 percentage point reduction (increase) in the ECB lending rate of its refinancing operations reduces (increases) the median of banks’ default risk across equilibria by around 50%, with substantial heterogeneity of this pass-through across time, banks and countries.

Keywords: bank runs, central bank policies, imperfect competition, multiple equilibria, structural estimation

JEL Classification: E44, E52, E58, G01, G21, L13

Suggested Citation

Albertazzi, Ugo and Burlon, Lorenzo and Pavanini, Nicola and Jankauskas, Tomas, The (Unobservable) Value of Central Bank's Refinancing Operations (October, 2020). ECB Working Paper No. 20202480, Available at SSRN: https://ssrn.com/abstract=3708226

Ugo Albertazzi (Contact Author)

ECB -DG Monetary Policy ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Lorenzo Burlon

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Nicola Pavanini

Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://https://sites.google.com/site/nicolapavanini/

Tilburg University - Tilburg University School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

CEPR IO Programme ( email )

London
United Kingdom

Tomas Jankauskas

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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