Central bank liquidity policy and the cross-section of bank equity returns

This paper examines abnormal bank equity returns around the announcement and implementations of the largest central bank liquidity operations to date. Those were conducted by the European Central Bank (ECB) at the height of the sovereign debt crisis in 2011 and 2012. I find that banks in countries perceived as being relatively riskier at the time experienced larger positive abnormal equity returns. Relating country-level abnormal returns to country-level liquidity uptake shows that banks with higher liquidity uptake profit disproportionately more from larger returns over this period. This provides evidence that the ECB alleviates stress in the euro area through the provisioning of relatively more liquidity to banks in riskier countries