What happens when the ECB opens the cash tap? : an application to the Portuguese credit market

• Autor(a) principal: Ferreira, Miguel Cravo
• Data de Publicação: 2019
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.14/26904
• topic: TLTRO; Liquidity injection; Risk-taking; Cash holdings; Corporate investment; Injeção de liquidez; Tomada de risco; Tesouraria; Investimento corporativo; Domínio/Área Científica::Ciências Sociais::Economia e Gestão

During the 2008 subprime crisis, central banks took unprecedented measures to restore financial markets. In an effort to boost the Eurozone economy, the ECB introduced the Targeted Longer-Term Refinancing Operations (TLTRO) to stimulate bank lending to the real economy. In this dissertation, using proprietary data from the Bank of Portugal, we show that the TLTRO intervention is positively related with an increase in credit granted to Portuguese firms. Nevertheless, these funds were transmitted to the economy mainly during the last three days of the month and through credit lines, which are riskier, given the lower credit worthiness of borrowers. We empirically confirm this fact, given the higher default rate ex post. We also find that companies held less cash after the TLTRO injection. However, the impact of these injections depends, to a great extent, on a company’s marginal value of cash, where we find that highly levered firms increased their cash holdings, as opposed to less levered firms. Finally, we show that, after the ECB´s liquidity injection, Portuguese companies decreased their investments and instead used the extra funds as a liquidity buffer. Overall, we provide evidence on two previously undocumented effects of the ECB’s Targeted Longer-Term Refinancing Operation: banks provided riskier loans and borrowers did not use the funds for investment purposes.