Risk Endogeneity at the Lender/Investor-of-Last-Resort

60 Pages Posted: 1 Feb 2019

See all articles by Diego Caballero

Diego Caballero

European Central Bank (ECB)

Andre Lucas

Vrije Universiteit Amsterdam; Tinbergen Institute

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research

Xin Zhang

Sveriges Riksbank - Research Division

Multiple version iconThere are 2 versions of this paper

Date Written: January 25, 2019

Abstract

We address the question to what extent a central bank can de-risk its balance sheet by unconventional monetary policy operations. To this end, we propose a novel risk measurement framework to empirically study the time-variation in central bank portfolio credit risks associated with such operations. The framework accommodates a large number of bank and sovereign counterparties, joint tail dependence, skewness, and time-varying dependence parameters. In an application to selected items from the consolidated Eurosystem’s weekly balance sheet between 2009 and 2015, we find that unconventional monetary policy operations generated beneficial risk spill-overs across monetary policy operations, causing overall risk to be nonlinear in exposures. Some policy operations reduced rather than increased overall risk.

Keywords: credit risk, risk measurement, central bank, lender-of-last-resort, unconventional monetary policy

JEL Classification: G21, C33

Suggested Citation

Caballero, Diego and Lucas, Andre and Schwaab, Bernd and Zhang, Xin, Risk Endogeneity at the Lender/Investor-of-Last-Resort (January 25, 2019). ECB Working Paper No. 2225 (2019); ISBN 978-92-899-3487-9 , Available at SSRN: https://ssrn.com/abstract=3324057 or http://dx.doi.org/10.2139/ssrn.3324057

Diego Caballero (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andre Lucas

Vrije Universiteit Amsterdam ( email )

SBE/EDS, De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Xin Zhang

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
48
Abstract Views
524
PlumX Metrics