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The role of collateral requirements in the crisis: one tool for two objectives?

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  • Paolo Fegatelli

Abstract

The implications of central bank collateral requirements for the monetary policy transmission mechanism and the working of the money market have often been neglected. Such implications, however, have clearly manifested during the course of the 2007-2009 crisis. As liquidity was vanishing in the interbank market, banks used (and abused of) central bank funding more intensively, in order to cover their financing needs. As a result, central bank collateral eligibility criteria have become even more critical than the policy rate as a factor of monetary policy transmission as well as a driver of liquidity in the interbank market. Thus, in the light of a retrospective analysis of some major events affecting monetary policy in the Euro area in the last two years, this study intends to properly reformulate the problem related to the choice of ?optimal? collateral requirements, by illustrating their interrelations with other central bank policy tools and targets. Ultimately, this approach allows us to derive a non-exhaustive set of recommendations for collateral and interest rate policies, as well as for central banks? exit strategies from the current unconventional measures.

Suggested Citation

  • Paolo Fegatelli, 2010. "The role of collateral requirements in the crisis: one tool for two objectives?," BCL working papers 44, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp044
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    File URL: https://www.bcl.lu/fr/Recherche/publications/cahiers_etudes/44/BCLWP044.pdf
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    Cited by:

    1. Mr. Manmohan Singh, 2013. "Collateral and Monetary Policy," IMF Working Papers 2013/186, International Monetary Fund.
    2. Manmohan Singh, 2013. "The Economics of Shadow Banking," RBA Annual Conference Volume (Discontinued), in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.),Liquidity and Funding Markets, Reserve Bank of Australia.
    3. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    4. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    5. Paolo Fegatelli, 2021. "The one trillion euro digital currency: How to issue a digital euro without threatening monetary policy transmission and financial stability?," BCL working papers 155, Central Bank of Luxembourg.
    6. Geng, Guangjie & Han, Zhixuan & Wu, Hongli & Cheng, Miao & WANG, RAN & Liu, Huan, 2024. "Collateral policy of the central bank and corporate financing costs: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    7. Gary Gorton & Andrew Metrick, 2010. "Regulating the Shadow Banking System," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(2 (Fall)), pages 261-312.
    8. Lewis, Brittany Almquist, 2023. "Creditor rights, collateral reuse, and credit supply," Journal of Financial Economics, Elsevier, vol. 149(3), pages 451-472.
    9. Düwel, Cornelia, 2013. "Repo funding and internal capital markets in the financial crisis," Discussion Papers 16/2013, Deutsche Bundesbank.

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    More about this item

    Keywords

    Collateral; Monetary policy; Central bank; Interbank market; Financial stability;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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