Money Markets, Central Bank Balance Sheet and Regulation

46 Pages Posted: 21 Oct 2020

See all articles by Stefano Corradin

Stefano Corradin

European Central Bank (ECB)

Jens Eisenschmidt

European Central Bank (ECB)

Marie Hoerova

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Tobias Linzert

affiliation not provided to SSRN

Glenn Schepens

ECB -Financial Research Division

Jean-David Sigaux

European Central Bank (ECB)

Date Written: October, 2020

Abstract

This paper analyses money market developments since 2005, and examines factors that have affected money market functioning. We consider several metrics of activity in both secured and unsecured euro area money markets, and study interactions with new Basel III regulations and with central bank policies (liquidity provision, asset purchases and the Securities Lending Programme). Using aggregate data, we document that, prior to 2015, heightened financial market volatility coincided with worsening money market conditions, while higher central bank liquidity provision was associated with reduced money market stress. After 2015, the evidence is consistent with central bank asset purchases inducing scarcity effects in some money market segments, and with active securities lending supporting money market functioning. Using transactions-level money market data combined with supervisory data, we further document that the leverage ratio regulation impacts money markets at quarter-ends due to “window-dressing” effects, reducing money market volumes and rates. We also consider the macroeconomic impact of changing money market conditions, finding that the impact depends on whether frictions originate in secured or unsecured markets and on central bank policies in place.

Keywords: E44, E58, G12, G20, G28

JEL Classification: E44, E58, G12, G20, G28

Suggested Citation

Corradin, Stefano and Eisenschmidt, Jens and Hoerova, Marie and Linzert, Tobias and Schepens, Glenn and Sigaux, Jean-David, Money Markets, Central Bank Balance Sheet and Regulation (October, 2020). ECB Working Paper No. 20202483, Available at SSRN: https://ssrn.com/abstract=3716200

Stefano Corradin (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jens Eisenschmidt

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marie Hoerova

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tobias Linzert

affiliation not provided to SSRN

No Address Available

Glenn Schepens

ECB -Financial Research Division ( email )

Frankfurt am Main
Germany

Jean-David Sigaux

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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