Working Paper Series no. 540: Can the Provision of Long-Term Liquidity Help to Avoid a Credit Crunch? Evidence from the Eurosystem's LTROs

Abstract

We exploit the Eurosystem’s longer-term refinancing operations (LTROs) of 2011-2012 to analyze the effects that a large provision of central bank liquidity to banks has on the credit supply to firms. We control for credit demand by examining firms that borrow from several banks, in addition to controlling for banks’ risk. We find that LTROs enhanced loan supply in France. Nevertheless, the transmission took place mostly with the first operation of December 2011, in which constrained banks bid more, and larger borrowers benefited more. The opportunity to substitute long-term central bank borrowing for short-term borrowing was instrumental in this transmission.

Philippe Andrade, Christophe Cahn, Henri Fraisse and Jean-Stéphane Mésonnier
March 2015

Classification JEL : C21, E51, G21, G28

Keywords : unconventional monetary policy, bank lending channel, euro area, LTRO, credit supply