Longer-term Refinancing Operations Research Articles

Unconventional Monetary Policy Transmission and Bank Lending Relationships

Firms with only one bank relationship make up the majority of firms in many economies. This paper explores whether policy-driven lending is differentially transmitted to single-bank firms in comparison with the multibank firms that are the focus of the literature. Using unique variation in the ECB’s very long-term refinancing operations (VLTROs), which affected lending to firms discontinuously across credit ratings but within banks, we find selective transmission of VLTRO liquidity to single-bank firms. Banks apply higher lending standards to single-bank firms, with banking relationships determining both new lending and lending maturity. By contrast, banks appear to transmit policy lending near-uniformly across multibank firms. This paper was accepted by David Sraer, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01871 .

The effects of the ECB’s unconventional monetary policies from 2011 to 2018 on banking assets

We examine the effects of all three major European Central Bank (ECB) unconventional monetary policies since 2011 for euro area banks’ holdings of loans, government securities and cash deposited in central banks. The three ECB’s policies are long-term refinancing operations (LTROs), asset purchase programs and the ECB’s interest rate at its deposit facility. We also compare the responses of non-crisis and crisis countries to these policies. Our evidence indicates that the ECB’s unconventional monetary policy measures increased bank loans across the euro area countries. The second round of LTROs, also known as targeted LTROs (TLTROs), conditioned additional lending on banks. This change had substantially larger effect on total lending by banks. The computed effects of the average sizes of LTROs and TLTROs indicate that in non-crisis countries, LTROs increased bank loans by 7.6 % of assets and TLTROs increased bank loans by 16.4 % of assets; the increases were 8.4 % and 14.6 % for LTROs and TLTROs, respectively, in crisis countries. We find that both LTROs and TLTROs were associated with decreases in government securities held by banks in non-crisis countries while the LTROs was associated with increases in government securities held by banks in crisis countries.

Can Central Banks Boost Corporate Investment? Evidence from ECB Liquidity Injections

AbstractLiquidity injections by central banks have become frequent and massive, but their real effects on corporate investment remain unclear. We examine the longer-term refinancing operations (LTROs) of the European Central Bank (ECB) during the eurozone sovereign crisis and show that greater LTRO funding to banks is associated with lower corporate investment. Riskier banks received funds through the LTROs and subsequently increased their holdings of risky sovereign debt. Corporate investment reductions are associated with these banks. Further, concurrent fiscal and regulatory policies impeded the effectiveness of the ECB liquidity injections. Our findings identify the contributing factors for these failures of monetary policy. (JEL E52, E58, G32)Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Lender of last resort, buyer of last resort, and a fear of fire sales in the sovereign bond market*

AbstractWe document the mechanism through which the risk of fire sales in the sovereign bond market contributed to the effectiveness of two major central bank interventions designed to restore financial stability during the European sovereign debt crisis. As a lender of last resort via the long‐term refinancing operations (LTROs), the European Central Bank (ECB) improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire‐sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB's announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire‐sale risk in the sovereign bond market.

Have Too-Big-to-Fail Expectations Diminished? Evidence from the European Overnight Interbank Market

Using the Eurosystem’s proprietary interbank loan data from June 2008–June 2020, we show that larger European banks have had a lower cost of overnight borrowing than smaller banks. The size premium remains significant after controlling for a large set of other factors but has decreased over time, especially in countries that were stricken by the Sovereign Debt Crisis. A difference-in-differences analysis suggests that the decline in the size premium is related to the actual bail-in events, not to the implementation dates of the Bank Recovery and Resolution Directive as such. This finding is robust to controlling for the effect of the ECB’s long-term refinancing operations. Overall, the results suggest that the regulatory move towards bail-in rather than bailout policies to deal with financially distressed banks has reduced the too-big-to-fail expectations concerning large banks.

The Effects of the ECB's Pandemic-Related Monetary Policy Measures

We assess the macroeconomic impact of pandemic-related monetary policy measures of the ECB. Conditioning on counterfactual interest rate paths that would have materialised in the absence of the policies, the macroeconomic effects are measured using structural vector autoregressions. In the framework, multiple monetary policy measures may simultaneously be analysed. According to our results, the asset purchase programmes implemented during the crisis have increased the annual GDP growth by approximate 2 percentage points in 2020–2021 and inflation by 0.5 percentage points. The longer-term refinancing operations have contributed positively but more mildly to the economic activity.

The Impact of Unconventional Monetary Policies on the Stocks of Bank Deposits: Evidence at an Aggregate Level in the Euro Area

Due to the severity and persistence of the global financial crisis started in 2007, central banks all over the world have adopted Unconventional Monetary Policies (UMPs), including negative policy rates, longer-term refinancing operations and large-scale purchases of financial assets. In this study, by referring to a time-series regression analysis with Newey-West correction, we evaluate the impact of UMPs implemented by the Eurosystem over the period 2008-2019 on the stocks of euro area banks’ deposit from households and non-financial corporations. The analysis of the effects of UMPs on the stocks of banks’ deposit represents a particularly innovative aspect of this research, where most of the scientific literature focuses on deposit interest rates. Our results suggest that the UMPs conducted by the Eurosystem have had a significant positive impact on euro area bank deposits, with particular reference to the relationship between Longer-term refinancing operations and Household overnight deposits, as well as between Securities held for monetary policy purposes and deposits from Households (total deposits) and from Corporates (overnight deposits).

The effects of macroeconomic, fiscal and monetary policy announcements on sovereign bond spreads

We assess the impact of announcements corresponding to different fiscal and monetary policy measures on 10-year sovereign bond yield spreads (relative to Germany) of 10 EMU countries during the period 01:1999-07:2016. Implementing country-fixed effects OLS regressions, we find that the European Commission’s (EC) releases of the excessive deficit procedure significantly affect yield spreads. The EC releases of higher debt and better budget balance forecasts contribute to the rise and the decline of spreads, respectively. Moreover, we find that the announcements of the ECB’s key interest rates together with the longer-term refinancing operations (LTROs) and the first covered bond purchase programme (CBPP1) negatively affect sovereign yield spreads in our sample of EMU countries. There was also some capital market mispricing of the sovereign bond risk in the Euro area before the Global Financial Crisis, notably regarding government debt forecasts.

Is ECB Rocking the Boat? Unconventional Monetary Policy in the EMU and Volatility Spillovers to Poland

ABSTRACTThe aim of the paper is to investigate volatility spillovers (i.e., spillovers in-variance) between the monetary policy stance of the European Central Bank and macro-financial variables in Poland. The monetary policy of the ECB is approximated by the shadow interest rate which takes into account various non-standard policy measures. We then perform event study regressions using several leading policy announcements and actions of the ECB. We find that volatility spillovers from the ECB’s unconventional policies to Poland were time-varying but modest for the entire period of 2008–2018. There is relatively scarce evidence on the structural changes in the dynamic conditional correlations for the POLONIA rate and EUR/PLN exchange rate. More pronounced volatility spillover effects are identified for the long-term interest rates after the first substantial reduction of interest rates in the EMU in 2008, and following the introduction of the negative interest rate policy in 2014. We find no significant evidence of spillovers associated directly with the implementation of more advanced unconventional tools, such as long-term refinancing operations or the Asset Purchase Programme.

Central Bank Interventions, Demand for Collateral, and Sovereign Borrowing Costs

We analyze the effect of unconventional monetary policy, in the form of collateralized lending to banks, on sovereign borrowing costs. Using our unique dataset on monthly security- and bank-level holdings of government bonds, we document that Portuguese banks increased their holdings of domestic public debt during the allotment of the three year Long-Term Refinancing Operations (LTRO) of the European Central Bank. We argue that domestic banks engaged in a trade, which involved the purchase of high-yield bonds with short maturities that could be pledged as collateral for low cost and long-term borrowing from the ECB. This significant increase in bond holdings was concentrated in shorter maturities, as these were especially suited to mitigate funding liquidity risk. The resulting steepening of the sovereign yield curve and the timing and characteristics of government bond auctions are consistent with a strategic response by the debt management agency.

Drastic Times Call for Drastic Measures: The ECB LTROs and Credit in The Eurozone Before and After December 2011

:We study the impact of the European Central Bank Long-term refinancing operations (ECB LTROs) on credit to the non-financial sector, using panel data on twelve countries of the Euro area between December 2008 and July 2014. The tests show that LTROs tested as a dummy have a favorable impact. However, till December 2011, the impact of the amount of LTROs was insignificant or negative. This suggests that full allotment liquidity measures, disclosing interbank markets liquidity needs, could generate adverse collateral effect disturbing the unconventional monetary policies transmission channels, in particular the signaling channel. Moreover, the effectiveness of the signaling channel of liquidity measures would rely on their use as the sole monetary policy tool carrying all the information about the policy stance, while the ECB, whose mandate usually focuses price stability, has twice raised twice its policy rate in 2011.

Can the Provision of Long-Term Liquidity Help to Avoid a Credit Crunch? Evidence from the Eurosystem’s LTRO

AbstractWe exploit the Eurosystem’s longer-term refinancing operations (LTROs) of 2011–2012 to assess whether a large provision of central bank liquidity to banks during a financial crisis has a positive impact on banks’ credit supply to firms. We control for credit demand by examining firms that borrow from several banks, in addition to controlling for confounding factors at the level of banks. We find that the LTROs enhanced loan supply: according to our baseline estimate, banks borrowing 1 billion euros from the facility increased their loan supply by 186 million euros over one year. We also find that the transmission mostly took place with the first operation of December 2011, in which banks that were more capital constrained bid more. Moreover, we show that the opportunity to substitute long-term central bank liquidity for short-term liquidity enhanced this transmission. Lastly, the operations benefited larger borrowers more and did not lead banks to increase their lending to riskier firms.

The eurozone (expected) inflation: An option's eyes view

We estimate inflation risk-neutral densities (RNDs) in the euro area, using inflation swaps and caps/floors options, and introduce a parsimonious approach to jointly estimate the RNDs across horizons. Thus, we obtain daily implicit RNDs for forward measures, such as the 5-year-on-5-year inflation rate, which, although not directly traded in the market, is a key reference for monetary policy. Then, we discuss several indicators derived from the information content of those historical RNDs that are relevant for policy makers, and compare them in light of the ECB's decisions and communication since 2009. Specifically, we study the evolution of tail risks (associated with deflation and high inflation), the balance of inflation risks, risk aversion, and how forward inflation rates react to the ECB's non-conventional monetary policies (Longer Term Refinancing Operations, LTRO; Securities Market Programme, SMP; Asset Purchase Programme, APP; and its variants and extensions).

Monetary Policy and Cross-Border Interbank Market Fragmentation: Lessons from the Crisis

We present a two-country model with an enhanced banking sector featuring risky lending and cross-border interbank market frictions. We find that (i) the strength of the financial accelerator, when applied to banks operating under uncertainty in an interbank market, will critically depend on the economic and financial structure of the economy; (ii) adverse shocks to the real economy can be the source of banking crisis, causing an increase in interbank funding costs, aggravating the initial shock; and (iii) central bank asset purchases and long-term refinancing operations can be effective substitutes for, or supplements to, conventional monetary policy. JEL Classification: E44, E52, F32, F36

Assessing the Macroeconomic Effects of LTROs during the Great Recession

AbstractIn response to the 2008–2009 crisis, faced with distressed financial intermediaries, the European Central Bank (ECB) embarked in longer term refinancing operations (LTROs) with full allotment. Using an estimated DSGE model with a frictional banking sector, we find that such liquidity injections have played a key role in averting a major credit crunch. A counterfactual analysis suggests that, absent these nonconventional measures, output, consumption, investment, and the GDP deflator would have been 2.5%, 0.5%, 9.7%, and 0.5% lower on average over 2009, respectively.

The Interbank Network Across the Global Financial Crisis: Evidence from Italy

This study examines the effects of the global financial crisis (GFC) on interbank market connectivity using network analysis. More specifically, using data on Italian banks’ bilateral interbank positions between 1998 and 2013, we analyze the impact of the following events on each bank’s network centrality: the liquidity crisis in August 2007, the collapse of Lehman Brothers in September 2008, Eurosystem’s long term refinancing operations (LTROs) between 2009 and 2012, the sovereign debt crisis in July 2011, and the announcement of Outright Monetary Transactions (OMT) in 2012. The results show that the 2007 liquidity crisis and especially the collapse of Lehman Brothers are associated with a marked reduction of the relative interconnectedness of the Italian banking sector (i.e., a shift in the distribution of banks’ centrality to the left, away from the most connected bank). In the following years, the system progressively recovered its initial patterns of integration among banks, which coincided with the main Eurosystem’s monetary policy interventions. However, the average outcome conceals different results across banks, depending on their characteristics and initial positions within the system.

Non-Standard Monetary Policies Implemented By The European Central Bank After The Financial Crisis

The financial crisis which began in the U.S. in 2007 influenced all economies on a global scale following the collapse of Lehman Brothers in September 2008. As a response to the crisis, central banks started to implement non-standard monetary policy tools as well as short-term interest rates also known as standard policy tools in order to help monetary policy transmission channels work effectively. The European Central Bank (ECB) implemented non-standard monetary policies as in addition to the standard policy tools during this period. The non-standard monetary policies introduced by the ECB were different from those implemented by other central banks (Fed, Bank of England) in terms of implementation and results. Firstly, the policies of the ECB were not specific to one single country. Secondly, the banking system was the major source of finance in Europe, which had an impact on the policies. In this regard, the ECB introduced a policy of enhanced credit support consisting of five main elements in order to maintain price stability over the medium term following the crisis. By 2010, public debt in some member countries of the European Union reached high levels, requiring them to take additional measures. The Securities Markets Programme was introduced to that end. Initially focusing on the debt securities of Greece, Ireland, and Portugal, the Securities Markets Programme was expanded in August 2011 to cover the debt securities of Italy and Spain. In addition, two Long-term Refinancing Operations (LTROs) were introduced. This article presents a descriptive analysis of the non-standard monetary policy tools introduced by the ECB following the financial crisis. However, the monetary policy implemented in the Euro zone is not specific to one single country, and every country has a different financial structure, both of which limit the effectiveness of the policies implemented. The changing structure of the monetary policy implemented in the aftermath of the crisis aims to help the transmission channel work effectively. This depends on countries’ having a strong budget and financial structure as well as an effective monetary policy. Therefore, general economic factors may have complicated impacts on shaping the expected results of the policies when there are various implementations of monetary policies.

The Eurozone (Expected) Inflation: An Option's Eyes View

We estimate inflation risk-neutral densities (RNDs) in the Euro area since 2009. We use Euro inflation swaps and caps/floors options, and introduce a simple and parsimonious approach to jointly estimate the RNDs across horizons. This way, we obtain the implicit RND for forward measures, like the five-on-five years inflation rate, which, although it is not directly traded in the market, it is a key rate for monetary policy. Then, we discuss several indicators derived from the information content of the historical RNDs that are useful for monetary policy and compare them in the light of the ECB’s decisions and communication over the last few years. Specifically, the evolution of tails risks (associated with deflation and high inflation); the balance of inflation risks; measures of risk aversion from the ECB’s Survey of Professional Forecasters (SPF); and how forward inflation rates react to the ECB’s non-conventional monetary policies (Longer Term Refinancing Operations, LTRO, Securities Market Programme, SMP, Asset Purchase Programme, APP, and its variants and extensions).

The interbank network across the global financial crisis: Evidence from Italy

This study examines the effects of the global financial crisis (GFC) on interbank market connectivity using network analysis. More specifically, using data on Italian banks’ bilateral interbank positions between 1998 and 2013, we analyze the impact of the following events on each bank's network centrality: the liquidity crisis in August 2007, the collapse of Lehman Brothers in September 2008, Eurosystem's long term refinancing operations (LTROs) between 2009 and 2012, the sovereign debt crisis in July 2011, and the announcement of Outright Monetary Transactions (OMT) in 2012. The results show that the 2007 liquidity crisis and especially the collapse of Lehman Brothers are associated with a marked reduction of the relative interconnectedness of the Italian banking sector (i.e., a shift in the distribution of banks’ centrality to the left, away from the most connected bank). In the following years, the system progressively recovered its initial patterns of integration among banks, which coincided with the main Eurosystem's monetary policy interventions. However, the average outcome conceals different results across banks, depending on their characteristics and initial positions within the system.

Did ECB Liquidity Injections Help the Real Economy?

Can monetary stimulus by central banks boost corporate investment? We answer this question by studying ECB's Longer-Term Refinancing Operations (LTROs), which provided cheap funding to Eurozone commercial banks to support the real sector. We find that, contrary to the intended result, firms reduced investment after their banks took LTRO funds from the ECB. The investment reduction is concentrated in firms with risky lenders, suggesting that borrowers' concerns about lender risk encouraged them to curb investment. The banks' LTRO uptakes were endogenously chosen: riskier banks took more funds from the LTROs. But, LTRO funds were mostly used to rollover existing loans. However, firms that obtained new loans from banks that availed of LTRO funds increased investment. Overall, our results highlight the challenges of boosting corporate investment through central bank injection of liquidity into the banking system, especially when bank balance sheets are impaired.