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The Portuguese money market throughout the crisis: What was the impact of ECB liquidity provision?

Ana Sofia Saldanha
Publication Year 
Money markets were severely impaired by the financial and sovereign debt crises. We investigate how the Portuguese part of the euro unsecured interbank money market was affected by the crises and how the ECB’s unconventional policy measures, in particular the fixed rate full allotment procedure, impacted the market. We adapt a widely used method in the economic literature to identify unsecured interbank loans – with maturities ranging from overnight to one-month – settled in TARGET payment system, in which at least one of the counterparties is a Portuguese bank. We find that the Portuguese unsecured money market was hit especially by the sovereign debt crisis. There was a significant reduction in market activity, both in the number of operations and in market turnover. Alongside, price dispersion increased and rates agreed upon loans became on average more expensive than the reference rate for the respective maturity. We also find that domestic loans were more expensive than loans traded with a foreign bank. Finally, by analyzing the impact of monetary policy measures taken during the crises’ periods, we find that the increased intermediation by the central bank contributed to a compression of spreads and a reduction in loan amounts. We observe that banks perceived as riskier began being penalized during the crisis.
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