We exploit announcements related to targeted longer-term financing operations (TLTROs)
as exogenous shocks in investor perceptions to test recent theories on bank funding liquidity
(Liu 2015, Ahnert et al. 2019). We find that banks with high derivative holdings and more
exposed to sovereign credit risk respond better to the ...
We exploit announcements related to targeted longer-term financing operations (TLTROs)
as exogenous shocks in investor perceptions to test recent theories on bank funding liquidity
(Liu 2015, Ahnert et al. 2019). We find that banks with high derivative holdings and more
exposed to sovereign credit risk respond better to the announcements, consistent with the view
that lower funding costs benefit banks with higher asset encumbrance and located in more
vulnerable Eurozone countries. The TLTRO announcements also elicit reductions in short
positions on bank stocks relative to stocks of non-financial corporations without impairing their
market liquidity. Robustness tests rule out that our results are driven by confounding events
and anticipation effects. Placebo tests confirm that the TLTRO announcements are driving the
estimated price reactions and changes in short positions.
