Working Papers

The (Unintended?) Consequences of the Largest Liquidity Injection Ever
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Co-authored with Matteo Crosignani and Miguel Faria-e-Castro
3rd SUERF/Unicredit & Universities Foundation Research Prize 2015
AFA 2016, SED 2016, CFIC 2017
Wall Street Journal, Frankfurter Allgemeine Zeitung

Abstract: We analyze a large and potentially unintended consequence of the largest liquidity injection ever conducted by a central bank: the European Central Bank’s (ECB) Three-Year Long-Term Refinancing Operations announced in December 2011 at the height of the euro crisis. Using a unique dataset of monthly security- and bank-level holdings of government bonds for Portugal, we nd that Portuguese banks engaged in a “collateral trade”, buying high yield domestic government bonds and pledging them to secure ECB funding. Banks purchased mostly short-term bonds so as to match the maturity of central bank loans with the maturity of the securities backing them. The impact of bank collateral trade is economically large as banks purchased short- and long-term government bonds for 8.4% and 3.1% of the amount outstanding, respectively. The observed steepening of the sovereign yield curve and pickup in public debt issuance are consistent with an effect on prices and a strategic reaction by the government debt agency. We argue that this phenomenon, together with other unconventional ECB policies, led to a stealth recapitalization of the banking sector of at least 7.2% of book equity.


The Portuguese Banking System During the Sovereign Debt Crisis (Portuguese version)

Banco de Portugal Economic Studies, 1(2), pp. 43-80, July 2015
Co-authored with Matteo Crosignani and Miguel Faria-e-Castro
Deutsche Bundesbank President speech

Abstract: We describe the evolution of balance sheets of monetary financial institutions (MFI) in Portugal before, during, and after the sovereign debt crisis of the late 2000’s. We account for several dimensions of heterogeneity including size, type, and nationality. We find that the Portuguese MFI sector rapidly expanded and increased its leverage before and during the crisis until 2012, after which it started a long deleveraging process. Many of the major aggregates, such as lending and deposits, follow this pattern. We observe a steady rise of non-traditional banking activities on both sides of the balance sheet of domestic institutions. The crisis weakened the international integration of the Portuguese financial sector, as domestic banks became less exposed to international counterparties. Finally, the Eurosystem and the Portuguese government have become relevant sources of funding as a result of the recent unprecedented monetary and fiscal interventions in the domestic financial system.