Working Paper: CEPR ID: DP17337
Authors: Carlo Altavilla; Miguel Boucinha; Lorenzo Burlon; Mariassunta Giannetti; Julian Schumacher
Abstract: Exploiting the introduction of the ECB’s tiering system for remunerating excess reserve holdings, we document the importance of the access to the money market for bank lending. We show that the two-tier system produced positive wealth effects for banks with excess reserves and encouraged a reallocation of liquidity toward banks with unused exemptions. This ultimately decreased the fragmentation in the money market and enhanced the transmission of monetary policy. Improved money market access incentivizes banks with unused allowances to extend more credit than other banks, including banks with excess liquidity whose valuations increased the most.
Keywords: money market; bank lending; negative interest rate policy
JEL Codes: G2; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ECB's tiering system (E52) | positive wealth effects for banks with excess reserves (G21) |
| positive wealth effects for banks with excess reserves (G21) | increased valuations for banks (G21) |
| increased valuations for banks (G21) | increased credit provision (E51) |
| banks with unused tiering allowances (G21) | extend more credit than others (G21) |
| decreased fragmentation in the money market (E44) | enhanced transmission of monetary policy (F42) |
| enhanced transmission of monetary policy (F42) | banks lend more efficiently (G21) |
| banks with high unused allowances (G21) | reduce their bond holdings (G12) |