The paper studies the mutual interplay between central bank liquidity provisions and interbank market liquidity exchanges, exploring whether the relationship changes during interbank market impairments and central bank massive liquidity injections in the global and sovereign crises. The analysis uses a dataset containing seventeen years of monthly bank-by-bank and counterparty-by-counterparty data from 1998 to 2015 in Italy.
The results show the existence of complementarity between central bank and interbank liquidities, both before and after the crisis. Banks receiving central bank liquidity redistribute more to other banks. When central bank liquidity increases exponentially during the crises, some healthy banks specialize in interbank lending. This complementarity helps to offset euro-area fragmentation via domestic interbank relationships and to adjust the collateral and maturity profiles of banks' liquidity.
