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Collateral damage

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Listed:
  • Gary GORTON
  • Toomas LAARITS

Abstract

A financial crisis is an event in which the holders of short-term debt come to question the collateral backing that debt. So, the resiliency of the financial system depends on the quality of that collateral. The authors show that there is a shortage of high-quality collateral by examining the convenience yield on short-term debt, which summarises the supply and demand for short-term safe debt, taking into account the availability of high-quality collateral. They then show how the private sector has responded by issuing more (unsecured) commercial paper at shorter maturities. The results suggest that there is a shortage of safe debt now compared to the pre-crisis period, implying that the seeds for a new shadow banking system to grow exist.

Suggested Citation

  • Gary GORTON & Toomas LAARITS, 2018. "Collateral damage," Financial Stability Review, Banque de France, issue 22, pages 73-82, April.
    • Handle: RePEc:bfr:fisrev:2018:22:7
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