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

Central banks have been blamed for the negative side effects of the non-conventional monetary policy measures they have implemented since 2008. In this paper, we argue that central banks played a positive role in the money... [ view full abstract ]

Central banks have been blamed for the negative side effects of the non-conventional monetary policy measures they have implemented since 2008. In this paper, we 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, we construct a “liquidity mismatch indicator (LMI)” for the aggregate banking sector that highlights the central bank influence on the bank liquidity condition. Our 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, our bank liquidity measure can be useful as an early warning indicator for the 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.