Systemic Risk and Monetary Policy: The Haircut Gap Channel of the Lender of Last Resort
Jasova,Martina Laeven,Luc Mendicino,Caterina Peydro,Jose-Luis Supera,Dominik
Jasova,Martina
Laeven,Luc
Mendicino,Caterina
Peydro,Jose-Luis
Supera,Dominik
Abstract
We show that lender of the last resort (LOLR) policy contributes to higher bank interconnectedness and systemic risk. Using novel micro-level data, we analyze the haircut gap channel of LOLR – the difference between the private market and central bank haircuts. LOLR increases interconnectedness by incentivizing banks to pledge higher haircut gap bonds, especially issued by similar banks and by systemically important banks. LOLR also exacerbates cross-pledging of bank bonds. Higher haircut gaps only incentivize banks, not other intermediaries without LOLR access, to increase bank bond holdings. Finally, LOLR revives bank bond issuance associated with higher haircut gaps.
Description
Date
2021-06
Journal Title
Journal ISSN
Volume Title
Publisher
SSRN
Research Projects
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Keywords
Central bank liquidity, haircuts, collateral, bank risk concentration, system risk, E44 - Financial Markets and the Macroeconomy, E52 - Monetary Policy, E58 - Central Banks and Their Policies, F30 - General, G01 - Financial Crises, G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages, SDG 17 - Partnerships for the Goals, SDG 1 - No Poverty, SDG 8 - Decent Work and Economic Growth, SDG 10 - Reduced Inequalities
Citation
Jasova, M, Laeven, L, Mendicino, C, Peydro, J-L & Supera, D 2021 'Systemic Risk and Monetary Policy: The Haircut Gap Channel of the Lender of Last Resort' SSRN. https://doi.org/10.2139/ssrn.3857237
License
info:eu-repo/semantics/openAccess