Working Papers

The (Unintended?) Consequences of the Largest Liquidity Injection Ever

Revise and Resubmit at the Journal of Monetary Economics

Co-authored with Matteo Crosignani and Miguel Faria-e-Castro
3rd SUERF/Unicredit & Universities Foundation Research Prize 2015
AFA 2016, SED 2016, CFIC 2017, ECB Forum 2015
Wall Street Journal, Frankfurter Allgemeine Zeitung

Abstract: We show that the design of lender-of-last-resort interventions can exacerbate the bank-sovereign nexus. During sovereign crises, central bank provision of long-term liquidity incentivizes banks to purchase high-yield eligible collateral securities matching the maturity of the central bank loans. Using unique security-level data, we find that the European Central Bank’s three-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds, equivalent to 10.6% of amounts outstanding, and pledge them to obtain central bank liquidity. The steepening of eurozone peripheral sovereign yield curves right after the policy announcement is consistent with the equilibrium effects of this “collateral trade.”


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.