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Skander Van den Heuvel

13 July 2018
WORKING PAPER SERIES - No. 2169
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Abstract
This paper investigates the costs and benefits of liquidity regulation. We find that liquidity tools are beneficial but cannot completely remove the need for Lender of Last Resort (LOLR) interventions by the central bank. Full compliance with current Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) rules would have reduced banks’ reliance on publicly provided liquidity during the global financial crisis without removing such assistance altogether. The paper also investigates the output costs of introducing the LCR and NSFR using two macro-financial models. We find these costs to be modest.
JEL Code
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
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Discussion papers
15 November 2018
WORKING PAPER SERIES - No. 2199
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Abstract
This paper examines the effects of monetary policy on the equity values of European banks. We identify monetary policy shocks by looking at changes in the EONIA one-month and two-year swap contract rates during narrow windows around the press statements and press conferences announcing monetary policy actions taken by the ECB. We find that an unexpected decrease of 25 basis points on the short-term policy rate increases banks’ stock prices by about 1% on average. These effects vary substantially over time; in particular, they were stronger during the crisis period and reversed during the recent period with low and even negative interest rates. That is, with rates close to or below zero, further interest rate cuts became detrimental for banks’ equity values. The composition of banks’ balance sheets is important in order to understand these effects. In particular, the change in sensitivity to interest rate surprises as rates drop to low and negative levels is much more pronounced for banks with a high reliance on deposit funding, compared to other banks. We argue that this pattern can be explained by a reluctance of banks to pay negative interest rates on retail deposits.
JEL Code
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
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