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Systemic Risk and Monetary Policy: The Haircut Gap Channel of the Lender of Last Resort

Author

Listed:
  • Laeven, Luc
  • Jasova, Martina
  • Mendicino, Caterina
  • Peydró, José-Luis
  • Supera, Dominik
Abstract
We show that lender of the last resort (LOLR) policy contributes to higher bank interconnectedness and associated 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.

Suggested Citation

  • Laeven, Luc & Jasova, Martina & Mendicino, Caterina & Peydró, José-Luis & Supera, Dominik, 2021. "Systemic Risk and Monetary Policy: The Haircut Gap Channel of the Lender of Last Resort," CEPR Discussion Papers 16240, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16240
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    Keywords

    Central bank liquidity; Haircuts; Collateral; Bank risk concentration; Systemic risk;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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
    • F30 - International Economics - - International Finance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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