Liquidity Coverage Ratios and Monetary Policy Credit in the Time of Corona

61 Pages Posted: 15 Jun 2022

See all articles by Viktoriya Gocheva

Viktoriya Gocheva

European Central Bank (ECB)

Yvo Mudde

De Nederlandsche Bank

Jens Tapking

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2022

Abstract

When a bank receives credit from the central bank, its Liquidity Coverage Ratio (LCR) changes. In most cases, the LCR increases. We investigate how this LCR boost from central bank credit affects banks’ behaviour, looking at the euro area during the Corona year 2020. Our theoretical and empirical analyses suggest that banks that get strong LCR boosts from central bank credit tend to take actions that reduce their LCRs. In this sense, banks consume their LCR boosts. In terms of policy conclusions, our analysis suggests that central bank credit operations can provide strong incentives for banks to take actions that reduce their LCRs. Such actions, which could include the provision of additional credit and a shortening of the maturity structure of the liabilities of the banks, plausibly have an impact on the real economy. As such, our analysis reveals what may be called a “LCR channel” of monetary policy transmission.

Keywords: central bank credit operations, Corona pandemic, Liquidity Coverage Ratio, monetary policy transmission

JEL Classification: E52, E58, G28

Suggested Citation

Gocheva, Viktoriya and Mudde, Yvo and Tapking, Jens, Liquidity Coverage Ratios and Monetary Policy Credit in the Time of Corona (June 1, 2022). ECB Working Paper No. 2022/2668, Available at SSRN: https://ssrn.com/abstract=4136992 or http://dx.doi.org/10.2139/ssrn.4136992

Viktoriya Gocheva (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Yvo Mudde

De Nederlandsche Bank ( email )

Netherlands

Jens Tapking

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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