FRIC/ Finance Seminar with Sascha Steffen, ESMT European School of Management and Technolog

FRIC Center for Financial Frictions and the Department of Finance are proud to announce the upcoming seminar with Sascha Steffen, ESMT European School of Management and Technology

Sascha Steffen will present

Do Central Bank Interventions Limit the Market Discipline from Short-Term Debt?

Authors:
Sascha Steffen, European School of Management and Technology
Viral Acharya, New York University
Diane Pierret, University of Lausanne

ABSTRACT
In this paper, we investigate the impact of European Central Bank (ECB) interventions on the private short-term funding of European banks and asset prices of sovereign bonds and bank stocks during the sovereign debt crisis. We show that consistent with a market discipline role of wholesale funding "runs," the U.S. money market funds reduced unsecured funding for risky banks exposed to Eurozone peripheral debt during summer 2011, while maintaining unsecured funding and increasing repo funding to low risk non-Eurozone banks. This market discipline effect of risk on funding liquidity is reversed with ECB interventions; Eurozone risky banks gain access to U.S. repos, and recover part of their unsecured funding after the intervention period. Short-term funding flowing back to risky banks coincides with increasing sovereign bond prices of peripheral countries. Event studies around ECB intervention dates support this: We find that banks with large holdings of risky sovereign debt experience abnormal stock returns and get increased access to U.S. MMF following ECB interventions.