The Effect of Central Bank Liquidity Injections on Bank Credit Supply

Luisa Carpinelli, Matteo Crosignani
2017 Social Science Research Network  
We study the effect of the largest central bank liquidity injection ever conducted, the European Central Bank 3-Year LTRO, on bank credit supply. Using the Italian credit registry, we show that banks exposed to the foreign wholesale market experience a run and reduce credit supply before the intervention and expand it after the central bank liquidity provision. We then exploit a regulatory change that expands the definition of central bank eligible collateral to identify the portion of
more » ... portion of liquidity uptakes driven by the funding shock. We show that (i) banks hit by the run are entirely responsible for the transmission to credit supply and (ii) other intermediaries use central bank refinancing to increase their holdings of liquid assets. Our findings show that the ECB liquidity injection had a positive 2% effect on bank credit supply. * We are extremely grateful to Viral Acharya, Philipp Schnabl, Alexi Savov, and Andres Liberman for their excellent guidance in this project. We also thank
doi:10.2139/ssrn.2930063 fatcat:6ok5nqfei5hj5cs3kwljheao6a