IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/20222649.html
   My bibliography  Save this paper

Money markets and bank lending: evidence from the adoption of tiering

Author

Listed:
  • Altavilla, Carlo
  • Boucinha, Miguel
  • Burlon, Lorenzo
  • Giannetti, Mariassunta
  • Schumacher, Julian

Abstract

Exploiting the introduction of the ECB’s tiering system for remunerating excess reserve holdings, we document the importance of 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 monetary policy transmission mechanism. The increased access to money market by banks with unused allowances incentivizes them to extend more credit than other banks, including banks with excess liquidity whose valuations increase the most. JEL Classification: G2, E5

Suggested Citation

  • Altavilla, Carlo & Boucinha, Miguel & Burlon, Lorenzo & Giannetti, Mariassunta & Schumacher, Julian, 2022. "Money markets and bank lending: evidence from the adoption of tiering," Working Paper Series 2649, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222649
    Note: 2279334
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2649~a6362c8ec3.en.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ricardo J. Caballero & Arvind Krishnamurthy, 2008. "Collective Risk Management in a Flight to Quality Episode," Journal of Finance, American Finance Association, vol. 63(5), pages 2195-2230, October.
    2. Gauti B Eggertsson & Ragnar E Juelsrud & Lawrence H Summers & Ella Getz, 2024. "Negative Nominal Interest Rates and the Bank Lending Channel," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(4), pages 2201-2275.
    3. Mauricio Ulate, 2021. "Going Negative at the Zero Lower Bound: The Effects of Negative Nominal Interest Rates," American Economic Review, American Economic Association, vol. 111(1), pages 1-40, January.
    4. Fuster, Andreas & Schelling, Tan & Towbin, Pascal, 2024. "Tiers of joy? Reserve tiering and bank behavior in a negative-rate environment," Journal of Monetary Economics, Elsevier, vol. 148(C).
    5. Kenneth Rogoff, 2017. "Dealing with Monetary Paralysis at the Zero Bound," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 47-66, Summer.
    6. Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2011. "Outside and Inside Liquidity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 259-321.
    7. Margherita Bottero & Ms. Camelia Minoiu & José-Luis Peydró & Andrea Polo & Mr. Andrea F Presbitero & Enrico Sette, 2019. "Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data," IMF Working Papers 2019/044, International Monetary Fund.
    8. Allen, Franklin & Carletti, Elena & Gale, Douglas, 2009. "Interbank market liquidity and central bank intervention," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 639-652, July.
    9. Douglas W. Diamond & Raghuram G. Rajan, 2011. "Fear of Fire Sales, Illiquidity Seeking, and Credit Freezes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 557-591.
    10. Viral V. Acharya & Ouarda Merrouche, 2013. "Precautionary Hoarding of Liquidity and Interbank Markets: Evidence from the Subprime Crisis," Review of Finance, European Finance Association, vol. 17(1), pages 107-160.
    11. Altavilla, Carlo & Boucinha, Miguel & Peydró, José-Luis, 2018. "Monetary policy and bank profitability in a low interest rate environment," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 33(96), pages 531-586.
    12. Jonathan Chiu & Jens Eisenschmidt & Cyril Monnet, 2020. "Relationships in the Interbank Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 170-191, January.
    13. Kenneth S. Rogoff, 2016. "The Curse of Cash," Economics Books, Princeton University Press, edition 1, number 10798.
    14. Jonathan Chiu & Jens Eisenschmidt & Cyril Monnet, 2020. "Relationships in the Interbank Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 170-191, January.
    15. Gara Afonso & Anna Kovner & Antoinette Schoar, 2011. "Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis," Journal of Finance, American Finance Association, vol. 66(4), pages 1109-1139, August.
    16. Asim Ijaz Khwaja & Atif Mian, 2008. "Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market," American Economic Review, American Economic Association, vol. 98(4), pages 1413-1442, September.
    17. Sefcik, Se & Thompson, R, 1986. "An Approach To Statistical-Inference In Cross-Sectional Models With Security Abnormal Returns As Dependent Variable," Journal of Accounting Research, Wiley Blackwell, vol. 24(2), pages 316-334.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Boucinha, Miguel & Burlon, Lorenzo & Corsi, Marco & della Valle, Guido & Eisenschmidt, Jens & Pool, Sebastiaan & Schumacher, Julian & Vergote, Olivier & Marmara, Iwona, 2022. "Two-tier system for remunerating excess reserve holdings," Occasional Paper Series 302, European Central Bank.
    2. Girotti, Mattia & Horny, Guillaume, 2023. "Monetary policy transmission through banks when liquidity is abundant but unevenly distributed," Finance Research Letters, Elsevier, vol. 56(C).
    3. Fricke, Daniel & Greppmair, Stefan & Paludkiewicz, Karol, 2024. "Excess reserves and monetary policy tightening," Discussion Papers 05/2024, Deutsche Bundesbank.
    4. Paludkiewicz, Karol & Fricke, Daniel & Greppmair, Stefan, 2024. "Excess Reserves and Monetary Policy Tightening," VfS Annual Conference 2024 (Berlin): Upcoming Labor Market Challenges 302364, Verein für Socialpolitik / German Economic Association.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Puriya Abbassi & Falk Bräuning & Falko Fecht & José-Luis Peydró, 2017. "International financial integration, crises, and monetary policy: evidence from the euro area interbank crises," Working Papers 17-6, Federal Reserve Bank of Boston.
    2. Altavilla, Carlo & Burlon, Lorenzo & Giannetti, Mariassunta & Holton, Sarah, 2022. "Is there a zero lower bound? The effects of negative policy rates on banks and firms," Journal of Financial Economics, Elsevier, vol. 144(3), pages 885-907.
    3. Bottero, Margherita & Minoiu, Camelia & Peydró, José-Luis & Polo, Andrea & Presbitero, Andrea F. & Sette, Enrico, 2022. "Expansionary yet different: Credit supply and real effects of negative interest rate policy," Journal of Financial Economics, Elsevier, vol. 146(2), pages 754-778.
    4. Abbassi, Puriya & Bräuning, Falk & Fecht, Falko & Peydró, José-Luis, 2022. "Cross-border interbank liquidity, crises, and monetary policy," Journal of International Economics, Elsevier, vol. 139(C).
    5. Puriya Abbassi & Falk Brauning & Falko Fecht & José-Luis Peydró, 2017. "International Financial Integration, Crises and Monetary Policy: Cross-Border Interbank Lending During the Euro Crises," Working Papers 965, Barcelona School of Economics.
    6. Mario Di Filippo & Angelo Ranaldo & Jan Wrampelmeyer, 2022. "Unsecured and Secured Funding," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(2-3), pages 651-662, March.
    7. Grandi, Pietro & Guille, Marianne, 2023. "Banks, deposit rigidity and negative rates," Journal of International Money and Finance, Elsevier, vol. 133(C).
    8. Margherita Bottero & Ms. Camelia Minoiu & José-Luis Peydró & Andrea Polo & Mr. Andrea F Presbitero & Enrico Sette, 2019. "Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data," IMF Working Papers 2019/044, International Monetary Fund.
    9. Antonis Kotidis & Dimitris Malliaropulos & Elias Papaioannou, 2022. "Public and private liquidity during crises times: evidence from Emergency Liquidity Assistance (ELA) to Greek banks," Working Papers 304, Bank of Greece.
    10. Abbassi, Puriya & Bräuning, Falk & Fecht, Falko & Peydró, José-Luis, 2014. "Cross-border liquidity, relationships and monetary policy: Evidence from the Euro area interbank crisis," Discussion Papers 45/2014, Deutsche Bundesbank.
    11. Schelling, Tan & Towbin, Pascal, 2022. "What lies beneath—Negative interest rates and bank lending," Journal of Financial Intermediation, Elsevier, vol. 51(C).
    12. Douglas D. Davis & Oleg Korenok & John P. Lightle, 2019. "An experimental examination of interbank markets," Experimental Economics, Springer;Economic Science Association, vol. 22(4), pages 954-979, December.
    13. Fecht, Falko & Reitz, Stefan, 2015. "Euro money market trading during times of crisis," Kiel Working Papers 2012, Kiel Institute for the World Economy (IfW Kiel).
    14. Berger, Allen N. & Guedhami, Omrane & Kim, Hugh H. & Li, Xinming, 2022. "Economic policy uncertainty and bank liquidity hoarding," Journal of Financial Intermediation, Elsevier, vol. 49(C).
    15. Demian Macedo & Victor Troster, 2021. "Liquidity shocks and interbank market failures: the role of deposit flights, non-performing loans, and competition," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 16(4), pages 705-746, October.
    16. A. Bernales & M. di Filippo, 2016. "The Information Contained in Money Market Interactions: Unsecured vs. Collateralized Lending," Working papers 598, Banque de France.
    17. S. Gabrieli & C.-P. Georg, 2014. "A network view on interbank market freezes," Working papers 531, Banque de France.
    18. Onofri, Marco & Peersman, Gert & Smets, Frank, 2023. "The effectiveness of a negative interest rate policy," Journal of Monetary Economics, Elsevier, vol. 140(C), pages 16-33.
    19. Iyer, Rajkamal & Da-Rocha-Lopes, Samuel & Peydró, José-Luis & Schoar, Antoinette, 2014. "Interbank Liquidity Crunch and the Firm Credit Crunch: Evidence from the 2007-2009 Crisis," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 27(1), pages 347-372.
    20. Brossard, Olivier & Saroyan, Susanna, 2016. "Hoarding and short-squeezing in times of crisis: Evidence from the Euro overnight money market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 163-185.

    More about this item

    Keywords

    bank lending; Money market; negative interest rate policy;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20222649. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.