Surviving the perfect storm: the role of the lender of last resort

Nuno Alves; Diana Bonfim; Carla Soares

doi:10.1016/j.jfi.2021.100918

Surviving the perfect storm: the role of the lender of last resort

Nuno Alves, Diana Bonfim^*, Carla Soares

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

4 Citations (Scopus)

Abstract

When banks are hit by a severe liquidity shock, central banks have a key role as lenders of last resort. Despite the well-established importance of this mechanism, it is challenging to analyze it empirically. We explore a unique setting in which banks suddenly lost access to market funding due to contagion fears at the onset of the euro area sovereign debt crisis. Using monthly data at the loan, bank, and firm level, we test the role of the central bank in a scenario of imminent collapse. We find that the liquidity obtained from the central bank played a key role in temporarily supporting the supply of credit to the real economy. However, the subdued loan demand, together with moral suasion and carry trade incentives, led to an increase in banks’ sovereign bond holdings using central bank funding.

Original language	English
Article number	100918
Number of pages	14
Journal	Journal of Financial Intermediation
Volume	47
DOIs	https://doi.org/10.1016/j.jfi.2021.100918
Publication status	Published - Jul 2021

Keywords

Credit channel
Financial crisis
Fixed rate full allotment
Lender of last resort
Monetary policy

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

Access to Document

10.1016/j.jfi.2021.100918

Cite this

@article{aa182f950bca433f88330288e775ddf7,

title = "Surviving the perfect storm: the role of the lender of last resort",

abstract = "When banks are hit by a severe liquidity shock, central banks have a key role as lenders of last resort. Despite the well-established importance of this mechanism, it is challenging to analyze it empirically. We explore a unique setting in which banks suddenly lost access to market funding due to contagion fears at the onset of the euro area sovereign debt crisis. Using monthly data at the loan, bank, and firm level, we test the role of the central bank in a scenario of imminent collapse. We find that the liquidity obtained from the central bank played a key role in temporarily supporting the supply of credit to the real economy. However, the subdued loan demand, together with moral suasion and carry trade incentives, led to an increase in banks{\textquoteright} sovereign bond holdings using central bank funding.",

keywords = "Credit channel, Financial crisis, Fixed rate full allotment, Lender of last resort, Monetary policy",

author = "Nuno Alves and Diana Bonfim and Carla Soares",

note = "Funding Information: The authors would like to thank Murillo Campello (the editor), two anonymous referees, Manuel Adelino, Ugo Albertazzi (discussant), Rui Albuquerque, Philippe Andrade (discussant), Ant{\'o}nio Antunes, Thorsten Beck, Andrada Bilan, Isabel Horta Correia, Matteo Crosignani, Hans Degryse, Falko Fecht (discussant), Fernando Ferreira, Miguel Ferreira, Paulo Guimar{\~a}es, Jochen Guntner (discussant), Isaac Hacamo, Vasso Ioannidou, Victoria Ivashina, Artashes Karapetyan, Catherine Koch (discussant), David Lando, Roland Meeks (discussant), Steven Ongena, Luca Opromolla, Francisca Rebelo, Hugo Reis, Pedro Teles, Anjan Thakor, participants at the ESCB Day Ahead Conference 2015, 9th Lubrafin Conference, 4th UECE Conference, Deutsche Bundesbank Workshop on Financial intermediaries and the real economy: One year after European Banking Union take-off, 2016 IBEFA/ASSA, Third Research Workshop of the Task Force on Banking Analysis for Monetary Policy of the MPC, 9th CEPR Swiss Winter Conference on Financial Intermediation, FEBS-2016, EEA-2016 and participants in seminars at the Banco de Portugal, the Eurosystem Monetary Policy Committee, Nova Research Group, Lisbon Finance Brownbag, Copenhagen Business School and Faculdade de Economia do Porto for insightful comments and suggestions. We would like to thank the Statistics and Market Operations Departments of Banco de Portugal for help with the data used in this paper. Bonfim acknowledges financial support from grants UID/GES/00407/2013 and PTDC/EGE-OGE/30314/2017 of the Portuguese Foundation for Science and Technology-FCT. The views expressed in this paper are those of the authors and do not reflect the views of Banco de Portugal or the Eurosystem. Funding Information: The authors would like to thank Murillo Campello (the editor), two anonymous referees, Manuel Adelino, Ugo Albertazzi (discussant), Rui Albuquerque, Philippe Andrade (discussant), Ant?nio Antunes, Thorsten Beck, Andrada Bilan, Isabel Horta Correia, Matteo Crosignani, Hans Degryse, Falko Fecht (discussant), Fernando Ferreira, Miguel Ferreira, Paulo Guimar?es, Jochen Guntner (discussant), Isaac Hacamo, Vasso Ioannidou, Victoria Ivashina, Artashes Karapetyan, Catherine Koch (discussant), David Lando, Roland Meeks (discussant), Steven Ongena, Luca Opromolla, Francisca Rebelo, Hugo Reis, Pedro Teles, Anjan Thakor, participants at the ESCB Day Ahead Conference 2015, 9th Lubrafin Conference, 4th UECE Conference, Deutsche Bundesbank Workshop on Financial intermediaries and the real economy: One year after European Banking Union take-off, 2016 IBEFA/ASSA, Third Research Workshop of the Task Force on Banking Analysis for Monetary Policy of the MPC, 9th CEPR Swiss Winter Conference on Financial Intermediation, FEBS-2016, EEA-2016 and participants in seminars at the Banco de Portugal, the Eurosystem Monetary Policy Committee, Nova Research Group, Lisbon Finance Brownbag, Copenhagen Business School and Faculdade de Economia do Porto for insightful comments and suggestions. We would like to thank the Statistics and Market Operations Departments of Banco de Portugal for help with the data used in this paper. Bonfim acknowledges financial support from grants UID/GES/00407/2013 and PTDC/EGE-OGE/30314/2017 of the Portuguese Foundation for Science and Technology-FCT. The views expressed in this paper are those of the authors and do not reflect the views of Banco de Portugal or the Eurosystem. Publisher Copyright: {\textcopyright} 2021 Elsevier Inc.",

year = "2021",

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doi = "10.1016/j.jfi.2021.100918",

language = "English",

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journal = "Journal of Financial Intermediation",

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AU - Bonfim, Diana

AU - Soares, Carla

N1 - Funding Information: The authors would like to thank Murillo Campello (the editor), two anonymous referees, Manuel Adelino, Ugo Albertazzi (discussant), Rui Albuquerque, Philippe Andrade (discussant), António Antunes, Thorsten Beck, Andrada Bilan, Isabel Horta Correia, Matteo Crosignani, Hans Degryse, Falko Fecht (discussant), Fernando Ferreira, Miguel Ferreira, Paulo Guimarães, Jochen Guntner (discussant), Isaac Hacamo, Vasso Ioannidou, Victoria Ivashina, Artashes Karapetyan, Catherine Koch (discussant), David Lando, Roland Meeks (discussant), Steven Ongena, Luca Opromolla, Francisca Rebelo, Hugo Reis, Pedro Teles, Anjan Thakor, participants at the ESCB Day Ahead Conference 2015, 9th Lubrafin Conference, 4th UECE Conference, Deutsche Bundesbank Workshop on Financial intermediaries and the real economy: One year after European Banking Union take-off, 2016 IBEFA/ASSA, Third Research Workshop of the Task Force on Banking Analysis for Monetary Policy of the MPC, 9th CEPR Swiss Winter Conference on Financial Intermediation, FEBS-2016, EEA-2016 and participants in seminars at the Banco de Portugal, the Eurosystem Monetary Policy Committee, Nova Research Group, Lisbon Finance Brownbag, Copenhagen Business School and Faculdade de Economia do Porto for insightful comments and suggestions. We would like to thank the Statistics and Market Operations Departments of Banco de Portugal for help with the data used in this paper. Bonfim acknowledges financial support from grants UID/GES/00407/2013 and PTDC/EGE-OGE/30314/2017 of the Portuguese Foundation for Science and Technology-FCT. The views expressed in this paper are those of the authors and do not reflect the views of Banco de Portugal or the Eurosystem. Funding Information: The authors would like to thank Murillo Campello (the editor), two anonymous referees, Manuel Adelino, Ugo Albertazzi (discussant), Rui Albuquerque, Philippe Andrade (discussant), Ant?nio Antunes, Thorsten Beck, Andrada Bilan, Isabel Horta Correia, Matteo Crosignani, Hans Degryse, Falko Fecht (discussant), Fernando Ferreira, Miguel Ferreira, Paulo Guimar?es, Jochen Guntner (discussant), Isaac Hacamo, Vasso Ioannidou, Victoria Ivashina, Artashes Karapetyan, Catherine Koch (discussant), David Lando, Roland Meeks (discussant), Steven Ongena, Luca Opromolla, Francisca Rebelo, Hugo Reis, Pedro Teles, Anjan Thakor, participants at the ESCB Day Ahead Conference 2015, 9th Lubrafin Conference, 4th UECE Conference, Deutsche Bundesbank Workshop on Financial intermediaries and the real economy: One year after European Banking Union take-off, 2016 IBEFA/ASSA, Third Research Workshop of the Task Force on Banking Analysis for Monetary Policy of the MPC, 9th CEPR Swiss Winter Conference on Financial Intermediation, FEBS-2016, EEA-2016 and participants in seminars at the Banco de Portugal, the Eurosystem Monetary Policy Committee, Nova Research Group, Lisbon Finance Brownbag, Copenhagen Business School and Faculdade de Economia do Porto for insightful comments and suggestions. We would like to thank the Statistics and Market Operations Departments of Banco de Portugal for help with the data used in this paper. Bonfim acknowledges financial support from grants UID/GES/00407/2013 and PTDC/EGE-OGE/30314/2017 of the Portuguese Foundation for Science and Technology-FCT. The views expressed in this paper are those of the authors and do not reflect the views of Banco de Portugal or the Eurosystem. Publisher Copyright: © 2021 Elsevier Inc.

PY - 2021/7

Y1 - 2021/7

N2 - When banks are hit by a severe liquidity shock, central banks have a key role as lenders of last resort. Despite the well-established importance of this mechanism, it is challenging to analyze it empirically. We explore a unique setting in which banks suddenly lost access to market funding due to contagion fears at the onset of the euro area sovereign debt crisis. Using monthly data at the loan, bank, and firm level, we test the role of the central bank in a scenario of imminent collapse. We find that the liquidity obtained from the central bank played a key role in temporarily supporting the supply of credit to the real economy. However, the subdued loan demand, together with moral suasion and carry trade incentives, led to an increase in banks’ sovereign bond holdings using central bank funding.

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KW - Credit channel

KW - Financial crisis

KW - Fixed rate full allotment

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KW - Monetary policy

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JO - Journal of Financial Intermediation

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ER -

Surviving the perfect storm: the role of the lender of last resort

Abstract

Keywords

UN SDGs

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CUBE: Católica Lisbon Research Unit in Business and Economics

Cite this

Surviving the perfect storm: the role of the lender of last resort

Abstract

Keywords

UN SDGs

Access to Document

Other files and links

Fingerprint

Projects

CUBE: Católica Lisbon Research Unit in Business and Economics

Cite this