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Collateral demand in wholesale funding markets

Author

Listed:
  • Coen, Jamie

    (Imperial College London)

  • Coen, Patrick

    (Toulouse School of Economics)

  • Hüser, Anne-Caroline

    (Bank of England)

Abstract

Repo markets are systemically important funding markets, but are also used by firms to obtain the assets provided as collateral. Do these two functions complement each other? We build and estimate a model of repo trade between heterogeneous firms, and find that the answer is no: volumes and gains to trade would both be higher absent collateral demand. This is because on average the firms that need funding are also those that value the collateral to speculate or hedge interest rate risk. These results have implications for policies that affect collateral demand in repo markets, including rules on short selling.

Suggested Citation

  • Coen, Jamie & Coen, Patrick & Hüser, Anne-Caroline, 2024. "Collateral demand in wholesale funding markets," Bank of England working papers 1082, Bank of England.
    • Handle: RePEc:boe:boeewp:1082
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2024/collateral-demand-in-wholesale-funding-markets.pdf
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    More about this item

    Keywords

    Repo; collateral demand; intermediation; financial crises;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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