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Central bank collateral, asset fire sales, regulation and liquidity

Author

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  • Bindseil, Ulrich

Abstract

This paper analyses the potential roles of bank asset fire sales and recourse to central bank credit to ensure banks' funding liquidity and solvency. Both asset liquidity and central bank haircuts are modelled as power functions within the unit interval. Funding stability is captured as strategic bank run game in pure strategies between depositors. Asset liquidity, the central bank collateral framework and regulation determine jointly the ability of the banking system to deliver maturity transformation and financial stability. The model also explains why banks tend to use the least liquid eligible assets as central bank collateral and why a sudden non-anticipated reduction of asset liquidity, or a tightening of the collateral framework, can destabilize short term liabilities of banks. Finally, the model allows discussing how the collateral framework can be understood, beyond its essential aim to protect the central bank, as financial stability and non-conventional monetary policy instrument. JEL Classification: E42, G21

Suggested Citation

  • Bindseil, Ulrich, 2013. "Central bank collateral, asset fire sales, regulation and liquidity," Working Paper Series 1610, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20131610
    Note: 327704
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1610.pdf
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    Citations

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    Cited by:

    1. Quentin Vandeweyer, 2019. "Essays in macroeconomics and monetary theory on the consequences of financial crises [Essais de théorie macroéconomique et monétaire sur les conséquences des crises financières]," SciencePo Working papers Main tel-03696685, HAL.
    2. F. Koulischer, 2015. "Asymmetric shocks in a currency union: The role of central bank collateral policy," Working papers 554, Banque de France.
    3. Quentin Vandeweyer, 2019. "Essays in macroeconomics and monetary theory on the consequences of financial crises [Essais de théorie macroéconomique et monétaire sur les conséquences des crises financières]," SciencePo Working papers tel-03696685, HAL.
    4. Koulischer, François & Struyven, Daan, 2014. "Central bank liquidity provision and collateral quality," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 113-130.
    5. Hałaj, Grzegorz, 2018. "System-wide implications of funding risk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 503(C), pages 1151-1181.
    6. J. Barthélemy & V. Bignon & B. Nguyen, 2018. "Monetary Policy and Collateral Constraints since the European Debt Crisis," Working papers 669, Banque de France.
    7. repec:prs:ecsecs:estat_0336-1454_2017_num_494_1_10784 is not listed on IDEAS
    8. Liu, Xiaoling & Wu, Yuhui & Zhang, Huan, 2023. "Collateral-based monetary policy and corporate employment: Evidence from Medium-term Lending Facility in China," Journal of Corporate Finance, Elsevier, vol. 78(C).
    9. Mark A. Carlson & Burcu Duygan-Bump & William R. Nelson, 2015. "Why Do We Need Both Liquidity Regulations and a Lender of Last Resort? A Perspective from Federal Reserve Lending during the 2007-09 U.S. Financial Crisis," Finance and Economics Discussion Series 2015-11, Board of Governors of the Federal Reserve System (U.S.).
    10. Ulrich Bindseil & Edoardo Lanari, 2020. "Fire Sales, the LOLR and Bank Runs with Continuous Asset Liquidity," Papers 2010.11030, arXiv.org.
    11. Corradin, Stefano & Eisenschmidt, Jens & Hoerova, Marie & Linzert, Tobias & Schepens, Glenn & Sigaux, Jean-David, 2020. "Money markets, central bank balance sheet and regulation," Working Paper Series 2483, European Central Bank.
    12. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69.
    13. Wedow, Michael & Koetter, Michael & Podlich, Natalia, 2017. "Inside asset purchase programs: the effects of unconventional policy on banking competition," Working Paper Series 2017, European Central Bank.
    14. Cassola, Nuno & Koulischer, François, 2019. "The collateral channel of open market operations," Journal of Financial Stability, Elsevier, vol. 41(C), pages 73-90.
    15. Giuseppe Ferrero & Michele Loberto & Marcello Miccoli, 2021. "The assets’ pledgeability channel of unconventional monetary policy," Economic Inquiry, Western Economic Association International, vol. 59(4), pages 1547-1568, October.
    16. J. Barthélemy & V. Bignon & B. Nguyen, 2017. "Illiquid Collateral and Bank Lending during the European Sovereign Debt Crisis," Working papers 631, Banque de France.
    17. Hałaj, Grzegorz, 2018. "Agent-based model of system-wide implications of funding risk," Working Paper Series 2121, European Central Bank.
    18. Schmidt, Kirsten, 2019. "Does liquidity regulation impede the liquidity profile of collateral?," Working Paper Series 2256, European Central Bank.
    19. Jan Kolesnik, 2021. "The Contagion Effect and its Mitigation in the Modern Banking System," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 1009-1024.
    20. Bachmann, Manuel, 2018. "Market Illiquidity, Credit Freezes and Endogenous Funding Constraints," Department of Economics Working Paper Series 255, WU Vienna University of Economics and Business.
    21. Manuel Bachmann, 2018. "Market Illiquidity, Credit Freezes and Endogenous Funding Constraints," Department of Economics Working Papers wuwp255, Vienna University of Economics and Business, Department of Economics.

    More about this item

    Keywords

    asset liquidity; bank run; central bank collateral framework; liquidity regulation; unconventional monetary policy;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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