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

Systemic Risk Centre Seminar

Date: Monday, 14th March 2022
Time: 1.00 - 2.00pm GMT
Speaker: Luc Laeven (European Central Bank)
Seminar Title: Systemic Risk and Monetary Policy: The Haircut Gap Channel of the Lender of Last Resort

Abstract: We show that lender of the last resort (LOLR) policy contributes to higher bank interconnectedness and 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.

Registration
This online public event is free and open to all but pre-registration is required. Registrations made after the start of the event may not be approved.