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The (Unintended?) Consequences of the Largest Liquidity Injection Ever (joint with Matteo Crosignani and Luis Fonseca)

Detail Summary
Date 27 September 2016
Time 13:00 - 14:30


We document a potentially unintended consequence of the European Central Bank’s Three-Year Long-Term Refinancing Operations. Using a unique dataset of security-level holdings, we find that Portuguese banks purchased short-term domestic government bonds and pledged them to secure central bank funding. The impact of this “collateral trade” is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance is consistent with a strategic reaction of the debt agency to the consequent yield curve steepening. Gains from this trade amounted to a stealth recapitalization of 7.2% of banking sector equity.