Systemic Risk and Monetary Policy: The Haircut Gap Channel of the Lender of Last Resort

92 Pages Posted: 1 Jun 2021 Last revised: 31 May 2023

See all articles by Martina Jasova

Martina Jasova

Columbia University, Barnard College - Department of Economics

Luc Laeven

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

Caterina Mendicino

European Central Bank (ECB) - Directorate General Research

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Dominik Supera

Columbia Business School

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2021

Abstract

We show that lender of the last resort (LOLR) policy contributes to higher bank interconnectedness. Using novel micro-level data, we analyze LOLR's haircut-gaps: the differences between the private market and central bank haircuts. LOLR policy incentivizes banks to increase pledging and holdings of higher haircut-gap bonds, especially issued by domestic and systemically important banks. Effects only apply to banks, not to non-banks without LOLR access. LOLR funding revives bank bond issuance associated with higher haircut-gaps and increases subsequent correlation between pledging and issuing banks' bond prices, in particular during periods of low-market returns and for domestic, systemically important banks.

Keywords: Central Bank Liquidity, Haircuts, Collateral, Bank Risk Concentration, Systemic Risk

JEL Classification: E44, E52, E58, F30, G01, G21

Suggested Citation

Jasova, Martina and Laeven, Luc A. and Mendicino, Caterina and Peydro, Jose-Luis and Supera, Dominik, Systemic Risk and Monetary Policy: The Haircut Gap Channel of the Lender of Last Resort (May 31, 2021). Available at SSRN: https://ssrn.com/abstract=3857237 or http://dx.doi.org/10.2139/ssrn.3857237

Martina Jasova (Contact Author)

Columbia University, Barnard College - Department of Economics ( email )

3009 Broadway
New York, NY 10027
United States

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Caterina Mendicino

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Jose-Luis Peydro

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

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

Dominik Supera

Columbia Business School ( email )

772 Kravis Hall
665 W 130th St.
New York, NY 10027
United States

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