The Design and Transmission of Central Bank Liquidity Provisions

Abstract

We analyze the role of loan maturity and collateral eligibility for the transmission of central bank liquidity provisions to banks following a wholesale funding dry-up. We analyze the transmission of the three-year LTRO—which substantially extended the ECB liquidity maturity—in Italy, where banks benefited from a government guarantee program that effectively relaxed the ECB collateral requirements. Combining the national credit register with banks’ securities holdings, we find that (i) the maturity extension supported banks’ credit supply and (ii) banks used most liquidity to buy domestic government bonds and substitute missing wholesale funding, two possibly unstated goals of the intervention.