Standing lending facility in interbank market: Evidence from China

Abstract

We observe an anomaly that SLF quantity expansion is often accompanied by higher interbank market rates. With the Shibor bid panel, this paper empirically shows that SLF easing encourages bank risk-taking activity, and amplifies bank liquidity demand. The induced demand dominates the liquidity supply effect and leads to higher interbank rates. Moreover, the risk-taking behavior of state-owned banks is more sensitive to SLF than that of non-state-owned banks. These features make SLF a better expectation management tool than a price-based or quantity-based tool for interbank market liquidity management.