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Liquidity dependencies in the euro area

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  • Carla Soares

Abstract

This study investigates to what extent the significant liquidity injections by the ECB over the past 15 years may have created a dependency by banks on central bank liquidity itself. Following Acharya et al. (2024), I examine whether the ECB’s liquidity provision changed banks’ incentives to increase liquid deposits, potentially heightening their susceptibility to liquidity shocks. Using both aggregate and bank-level data, I find that euro area banks tend to increase demand deposits and decrease time deposits with their holdings of excess reserves over the liquidity expansion phase and do not revert when aggregate liquidity starts to shrink. However, this is contained to specific periods, when interest rates were low and stable. The differences relative to the US could be related to distinct sources of liquidity and regulatory frameworks governing liquidity.

Suggested Citation

  • Carla Soares, 2025. "Liquidity dependencies in the euro area," Working Papers w202505, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w202505
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    File URL: https://www.bportugal.pt/system/files/documents/2025-05/WP202505_1.pdf/WP202505.pdf
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    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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