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Information insensitivity, collateral flows and the logic of financial stability

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  • A. Mantovi

Abstract

The role of collateralization in the dynamics of credit and liquidity provision is the subject of increasing research interest, for instance concerning the global macroeconomic role of safe assets. Still, when it comes to first principles of financial stability, questions of transparency seem to overshadow the relevance of collateralization arrangements and the specificity of networks of counterparties. According to Holmström (2015), the fact that liquidity requires transparency is a misunderstanding. The paper is meant to deepen the connection between the principle of “no questions asked” (NQA) on collateralized debt and the stabilizing properties of collateral flows in an equilibrium selection perspective. Conceptual and empirical implications are thoroughly discussed, and can be conjectured to represent lines of progress for the logic of financial stability, and for the theory of money as well. In a well known formula, money is a substitute for trust (Shubik, 1999); an analogous role for the NQA principle – collateral is a substitute for questions – can be conjectured to deserve comparable relevance.

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  • A. Mantovi, 2019. "Information insensitivity, collateral flows and the logic of financial stability," Economics Department Working Papers 2019-EP01, Department of Economics, Parma University (Italy).
    • Handle: RePEc:par:dipeco:2019-ep01
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    More about this item

    Keywords

    Money; Financial Stability; Information Sensitivity; Market Design; Equilibrium Selection; Political Economy;
    All these keywords.

    JEL classification:

    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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