Working Paper: CEPR ID: DP17053
Authors: Ugo Albertazzi; Lorenzo Burlon; Tomas Jankauskas; Nicola Pavanini
Abstract: We quantify how central bank unconventional monetary policy, in the form of funding facilities, reduced the banking sector’s intrinsic fragility in the euro area in 2014-2021. We estimate a micro-structural model of imperfect competition in the banking sector that allows for multiple equilibria with bank runs, banks’ default and contagion, and central bank funding. Our framework incorporates demand and supply for insured and uninsured deposits, for loans to firms and households, and borrowers’ default. We use confidential granular data for the euro area banking sector, including information on banks’ borrowing from the European Central Bank (ECB). We document the presence of alternative equilibria with run-type features, but also that central bank interventions exerted a crucial role in containing this risk. Our counterfactuals show that, on average across equilibria, a 1 percentage point reduction in the ECB lending rate leads to a 1.4 percentage points reduction in banks’ default probability.
Keywords: Central bank policies; Bank runs; Multiple equilibria; Imperfect competition; Structural estimation
JEL Codes: E44; E52; E58; G01; G21; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central bank funding facilities (E58) | intrinsic fragility of banks (F65) |
| 1 percentage point reduction in ECB lending rate (E52) | banks' default probability (G21) |
| central bank interventions (E58) | competition for deposits (G21) |
| central bank interventions (E58) | likelihood of bank runs (E44) |
| higher policy rates (E43) | banks' default probabilities (G33) |
| 1 percentage point increase in policy rate (E43) | overall welfare (I31) |
| expectations of central bank intervention (E52) | depositor behavior (D14) |
| central bank interventions (E58) | probability of defaults (G33) |