Finance and Economics Discussion Series (FEDS)

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April 2017

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

Luisa Carpinelli and Matteo Crosignani

Abstract:

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

DOI: https://doi.org/10.17016/FEDS.2017.038

PDF: Full Paper

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Last Update: January 09, 2020