Stabilising virtues of central banks: (re)matching bank liquidity

The Economics Department of the European Investment Bank provides economic analysis and studies to support EIB operations and to help define its positioning, strategy and policy. The Economics Department is a team of 25 economists and staff, under the responsibility of the Director Debora Revoltella.

EIB Working papers allow guest authors to explore particular topics in depth, often relating to the annual EIB Economics Conference publication.

In this paper, the authors argue that central banks played a positive role in the money market and interbank liquidity recovery.

Using novel, micro data of the French banking system on the pool of collateral eligible to ECB open market operations, the authors construct a 'liquidity mismatch indicator (LMI)' for the aggregate banking sector that highlights the central bank influence on the bank liquidity condition.

The results show that central bank liquidity and haircut policies have indeed helped banks to reduce the mismatch of liquidity between their assets and their liabilities that had widened after the 2011 stress episode.

Moreover, the bank liquidity measure can be useful as an early warning indicator for macro-prudential purposes. It gives the 'cash equivalent value' of the French banking sector and indicates the amount of the liquidity support that the ECB might have to provide in case of financial crisis.

The LMI can also help identify the systematically important French institution in terms of their liquidity exposures.

• Primary Source

EIB: Publications: Economic Research: Working Papers http://www.eib.org/infocentre/publications/all/economic-research/working-papers.htm

EIB: Publications: Economic Research http://www.eib.org/infocentre/publications/all/economic-research/index.htm

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