Finance and Economics Discussion Series (FEDS)
The Effect of Central Bank Liquidity Injections on Bank Credit Supply
Luisa Carpinelli and Matteo Crosignani
We study the effectiveness of central bank liquidity injections in restoring bank credit supply following a wholesale funding dry-up. We combine borrower-level data from the Italian credit registry with bank security-level holdings and analyze the transmission of the European Central Bank three-year Long Term Refinancing Operation. Exploiting a regulatory change that expands eligible collateral, we show that banks more affected by the dry-up use this facility to restore their credit supply, while less affected banks use it to increase their holdings of high-yield government bonds. Unable to switch from affected banks during the dry-up, firms benefit from the intervention.
Accessible materials (.zip)
Keywords: Bank Credit Supply, Bank Wholesale Funding, Lender of Last Resort, Unconventional Monetary Policy
PDF: Full Paper