The Effect of Central Bank Liquidity Injections on Bank Credit Supply

Carpinelli, Luisa; Crosignani, Matteo

doi:10.17016/FEDS.2017.038

Working Paper

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

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.

Keywords: Bank Credit Supply; Bank Wholesale Funding; Lender of Last Resort; Unconventional Monetary Policy;

JEL Classification: E50; E58; G21; H63;

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