The paper “Lender of Last Resort versus Buyer of Last Resort – Evidence from the European Sovereign Debt Crisis” by Viral Acharya, Diane Pierret and Sascha Steffen has been presented at the American Finance Association meeting (AFA) on 6 - 8 January in Chicago. The paper was produced with support of the project ”Quantitative Easing and Financial (In)Stability” funded by Volkswagen Foundation.
The paper documents channels of monetary policy transmission to banks following two interventions of the European Central Bank (ECB). As a lender of last resort via the long-term refinancing operations (LTROs), the ECB improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire-sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire-sale risk in the sovereign bond market.
The AFA – one of the most important conferences in Finance in the world – is devoted to the study and promotion of knowledge about financial economics.