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

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  • Vincent Legroux
  • Imene Rahmouni-Rousseau
  • Urzula Szczerbowicz
  • Natacha Valla

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 a 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 have indeed helped French banks to reduce the liquidity mismatch.

Suggested Citation

  • Vincent Legroux & Imene Rahmouni-Rousseau & Urzula Szczerbowicz & Natacha Valla, 2018. "Stabilising virtues of central banks: (re)matching bank liquidity," Working papers 667, Banque de France.
    • Handle: RePEc:bfr:banfra:667
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    2. Jean Barthélemy & Vincent Bignon & Benoit 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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    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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