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Collateral requirements in central bank lending

Author

Listed:
  • Du, Chuan

    (Bank of England)

Abstract

In periods of stress, acute liquidity squeeze can manifest in the riskier segments of the credit market, even amid a surplus of aggregate liquidity. In such scenarios, central bank interventions that directly lower the risky interest rate can be more effective than reductions in the risk-free interest rate. Specifically, the central bank lends to the market at more favourable interest rates while simultaneously reducing the haircuts imposed on eligible collateral. In doing so, the central bank takes on greater credit risk, but achieves an outcome that is more productively efficient than simply reducing the risk-free interest rate.

Suggested Citation

  • Du, Chuan, 2022. "Collateral requirements in central bank lending," Bank of England working papers 987, Bank of England.
    • Handle: RePEc:boe:boeewp:0987
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    More about this item

    Keywords

    Collateral; leverage; credit conditions; monetary policy; general equilibrium;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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