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Stabilising virtues of central banks: (Re)matching bank liquidity

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  • Legroux, Vincent
  • Rahmouni-Rousseau, Imène
  • Szczerbowicz, Urszula
  • Valla, Natacha

Abstract

The liquidity of financial system plays a central role in systemic crises. In this paper, we show that the ECB haircut policies provided an important liquidity support to distressed financial institutions during the euro area sovereign debt turmoil. Using novel, micro data on the pool of collateral eligible to ECB open market operations, we construct a “public” liquidity mismatch indicator (LMI) for the French aggregate banking sector based on the ECB haircuts. We then compare it to the “private” LMI based on the haircuts in private repo markets in the spirit of Bai et al. (2018). The difference between the two indicators represents a new measure of the ECB liquidity support. Our results suggest that the ECB haircut policies indeed helped French banks to reduce the liquidity mismatch. Moreover, higher ECB liquidity support is associated with higher cash and sovereign asset holdings by the French banks as well as with their lower probability of default.

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  • Legroux, Vincent & Rahmouni-Rousseau, Imène & Szczerbowicz, Urszula & Valla, Natacha, 2022. "Stabilising virtues of central banks: (Re)matching bank liquidity," Journal of Banking & Finance, Elsevier, vol. 134(C).
    • Handle: RePEc:eee:jbfina:v:134:y:2022:i:c:s0378426621002740
    DOI: 10.1016/j.jbankfin.2021.106323
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    2. J. Barthélemy & V. Bignon & B. Nguyen, 2018. "Monetary Policy and Collateral Constraints since the European Debt Crisis," Working papers 669, Banque de France.
    3. Xuanling MA & Meng JI, 2023. "Analysis on Liquidity Risk Management of Monetary and Financial Services based on the Goal of Financial Stability," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 72-91, June.

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    More about this item

    Keywords

    Bank liquidity; Liquidity mismatch; Monetary policy; Central bank; Haircuts; Collateral framework;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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