Abstract

THE EFFECT OF EMERGENCY LIQUIDITY ASSISTANCE (ELA) ON BANK LENDING
DURING THE EURO AREA CRISIS


Heather D. Gibson
Bank of Greece

Stephen G. Hall
University of Leicester, Bank of Greece and University of Pretoria 

Pavlos Petroulas
Bank of Greece

Vassilis Spiliotopoulos 
Bank of Greece

George S. Tavlas
Bank of Greece and University of Leicester

Abstract

We examine the impact of emergency liquidity assistance (ELA) on bank lending in eleven euro area countries during the financial crisis. With the intensification of the crisis, ELA took on a pivotal role in some countries. However, assessments of the quantitative impact of ELA in the literature are non-existent. We estimate a structural panel model for the determination of bank lending, which includes the amount of ELA received by each bank, allowing us to investigate the direct effect of ELA on lending. Our model corrects a mis-specification found in the prototype model used in the literature. We then undertake a VAR analysis, which allows us to address the effect of ELA on GDP. Finally, we examine spillover effects among banks, indicating that ELA generated positive spillovers to other banks. 

Keywords: euro area financial crisis, emergency liquidity assistance (ELA), European banks, spatial panel model

JEL-Classification: E3, G01, G14, G21

Acknowledgements: We thank Joshua Aizenman and the referees for constructive comments on an earlier version of this paper. The views expressed in this paper are the authors’ own and do not necessarily represent those of the institutions to which they are affiliated.

Correspondence:
George S. Tavlas
Bank of Greece
21 E Venizelos Ave
Athens, 10250, Greece
Tel. no. +30 210 320 2370
Fax. no. +30 210 320 2432
Email address: gtavlas@bankofgreece.gr 



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