ECB Euro Liquidity Lines

Abstract

The use of central bank liquidity lines has gained momentum since the global financial crisis in order to provide liquidity in foreign exchange markets, while at the same time preventing threats to financial stability and negative spillbacks. US dollar swap lines are well studied, but much less is known about the effects of liquidity lines in euros. We use a difference-in-differences strategy to show that the announcement of ECB euro liquidity lines has a direct positive signalling effect since the premium paid by foreign agents to borrow euros in FX markets decreases up to 76 basis points relative to currencies not covered by these facilities. Additionally, the paper provides suggestive evidence that these facilities generate positive spillbacks to the euro area since domestic bank equity prices increase by 6.7% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines.