Who borrows from the Eurosystem’s lender-of-the-last-resort facility?

Abstract

We use a unique data set that comprises for each German bank its recourse to the Eurosystem’s marginal lending facility (MLF) along with a large variety of detailed bank level data including the daily liquidity position to study the drivers of banks’ recourse to the LOLR facility for the period January 2004 to October 2010. We find that larger banks and banks with lower liquidity buffers and higher idiosyncratic liquidity risks make more frequent and extensive use of the LOLR support. These results not only hold for crises periods and episodes of tight money markets but also for tranquil periods, irrespective of the different monetary policy regimes. Our results have two implications: First, they suggest that riskier banks benefit more from the LOLR-facility, which might affect competition in the financial sector, promoting riskier banks and foster risk-taking behaviour. Second, data on banks’ reserve management can be a useful tool for microprudential supervision to derive high-frequency indicators for predicting liquidity shortages at the individual bank level.