The Eurosystem’s central intermediary role became even more evident when it started to supply long-term liquidity via one-year and three-year longer-term refinancing operations (LTROs). The three-year LTROs were introduced to support bank lending. Furthermore, they eased tensions in the sovereign bond markets of the peripheral countries, as banks intensified their government bond purchases.
However, we have observed a strong preference on the part of banks to buy bonds issued by their home countries. This amplified the interdependence of the banking sector and the domestic sovereign bond market in certain euro-area countries and aggravated the existing geographical segmentation. The geographical segmentation is reflected in European banks’ reliance on Eurosystem refinancing.