Central Bank Refinancing, Interbank Markets, and the Hypothesis of Liquidity Hoarding : Evidence from a Euro-Area Banking System

This paper analyses the effect of the crisis on central bank's refinancing and interbank market. It uses monthly banking-group data on all banks operating in Italy from the inception of the single Eurosystem monetary policy to August 2011. It investigates both directions of the casual nexus between central bank refinancing and interbank market. It explores the connections among the different segments of the interbank market: domestic and non-domestic; extra-group and intra-group; bilateral and via central counterparties. It adopts two empirical methods (sample time splitting and difference-in-difference analysis), several estimation techniques (IV, SUR, tobit-IV), and a broad range of robustness checks. The outcomes show that, even during the crisis, the Italian interbank market has functioned well and, contrary to some very popular conjectures, the rise in central bank's liquidity has been intermediated among banks and towards the economy