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

70 Pages Posted: 1 Jun 2021

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

University of Pennsylvania - The Wharton 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 and systemic risk. Using novel micro-level data, we analyze the haircut gap channel of LOLR – the difference between the private market and central bank haircuts. LOLR increases interconnectedness by incentivizing banks to pledge higher haircut gap bonds, especially issued by similar banks and by systemically important banks. LOLR also exacerbates cross-pledging of bank bonds. Higher haircut gaps only incentivize banks, not other intermediaries without LOLR access, to increase bank bond holdings. Finally, LOLR revives bank bond issuance associated with higher haircut gaps.

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

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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