Long-term Central Bank Repos and Bank Rollover Risk

Abstract

Over a period of more than four years the ECB has repeatedly and in addition to its standard monetary refinancing operations offered repos with extraordinarily long durations. This paper argues that such operations serve the function of reducing rollover risks for Eurozone banks. The data shows that high rollover (and borrowing) costs of banks in struggling countries correlate with the ECB's offering periods of these additional longer-dated repos. Banks with high rollover costs take disproportionately more Eurosystem liquidity and profit, expost, exceptionally from market borrowing cost reductions. As discussed, sheltering banks from rollover risks prevents some banks' equity holders (possibly erroneously) from deciding to let the bank default on its obligations. Moreover, such measures neither solve bank debt overhang (Myers, 1977) nor do they bail out banks efficiently (Bhattacharya and Nyborg, 2013). The inefficiency feature may have implications for the observed increase in fragmentation in the Euro area, the bank-sovereign nexus, and the risk composition of the ECB's balance sheet.