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Risk endogeneity at the lender/investor-of-last-resort

Author

Listed:
  • Caballero, Diego

    (European Central Bank)

  • Lucas, Andr e

    (Vrije Universiteit Amsterdam and Tinbergen Institute)

  • Schwaab, Bernd

    (European Central Bank)

  • Zhang, Xin

    (Research Department, Central Bank of Sweden)

Abstract

To what extent can a central bank influence its own balance sheet credit risks during a financial crisis through unconventional monetary policy operations? To study this question we develop a risk measurement framework to infer the time-variation in portfolio credit risks at a high (weekly) frequency. Focusing on the Eurosystem's experience during the euro area sovereign debt crisis between 2010 and 2012, we find that the announcement and implementation of unconventional monetary policy operations generated beneficial risk spill-overs across policy portfolios. This caused overall risk to be nonlinear in exposures. In some instances the Eurosystem reduced its overall balance sheet credit risk by doing more, in line with Bagehot's well-known assertion that occasionally "only the brave plan is the safe plan."

Suggested Citation

  • Caballero, Diego & Lucas, Andr e & Schwaab, Bernd & Zhang, Xin, 2019. "Risk endogeneity at the lender/investor-of-last-resort," Working Paper Series 382, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0382
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    More about this item

    Keywords

    lender-of-last-resort; unconventional monetary policy; portfolio credit risk; longer-term operational framework; central bank communication.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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