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The collateral channel of open market operations

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  • Cassola, Nuno
  • Koulischer, François

Abstract

We propose a model of collateral choice by banks to quantify how changes in the haircut policy of the central bank affect the collateral used by banks and the funding cost of banks. We estimate the model using data on assets pledged to the European Central Bank from 2009 to 2011. Our results suggest that an increase in the haircut on low rated collateral by 5 percentage points would have reduced the use of this collateral by 10% but would have increased the average funding cost spread between high yield and low yield countries by 5% over our sample period.

Suggested Citation

  • Cassola, Nuno & Koulischer, François, 2019. "The collateral channel of open market operations," Journal of Financial Stability, Elsevier, vol. 41(C), pages 73-90.
    • Handle: RePEc:eee:finsta:v:41:y:2019:i:c:p:73-90
    DOI: 10.1016/j.jfs.2019.03.002
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    Cited by:

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    2. Garvin, Nicholas, 2024. "Emergency liquidity injections," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1496-1513.
    3. 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).
    4. Pelizzon, Loriana & Riedel, Max & Simon, Zorka & Subrahmanyam, Marti G., 2024. "Collateral eligibility of corporate debt in the Eurosystem," Journal of Financial Economics, Elsevier, vol. 153(C).
    5. Hasan, Iftekhar & He, Qing & Lu, Haitian, 2020. "The impact of social capital on economic attitudes and outcomes," Journal of International Money and Finance, Elsevier, vol. 108(C).
    6. George Pantelopoulos, 2021. "Can Central Banks circumvent the impossible trinity within their operational frameworks? Theory and evidence," The World Economy, Wiley Blackwell, vol. 44(7), pages 2041-2075, July.
    7. Jean‐Stéphane Mésonnier & Charles O'Donnell & Olivier Toutain, 2022. "The Interest of Being Eligible," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(2-3), pages 425-458, March.
    8. Matthias Kaldorf & Florian Wicknig, 2021. "Risky Financial Collateral, Firm Heterogeneity, and the Impact of Eligibility Requirements," ECONtribute Discussion Papers Series 123, University of Bonn and University of Cologne, Germany.
    9. Arismendi-Zambrano, Juan & Belitsky, Vladimir & Sobreiro, Vinicius Amorim & Kimura, Herbert, 2022. "The implications of dependence, tail dependence, and bounds’ measures for counterparty credit risk pricing," Journal of Financial Stability, Elsevier, vol. 58(C).
    10. Bank for International Settlements, 2019. "Unconventional monetary policy tools: a cross-country analysis," CGFS Papers, Bank for International Settlements, number 63.
    11. Qi, Qianru & Wang, Jing, 2021. "Debt structure instability using machine learning," Journal of Financial Stability, Elsevier, vol. 57(C).
    12. Schmidt, Kirsten, 2019. "Does liquidity regulation impede the liquidity profile of collateral?," Working Paper Series 2256, European Central Bank.
    13. Vergote, Olivier & Sugo, Tomohiro, 2020. "Who takes the ECB’s targeted funding?," Working Paper Series 2439, European Central Bank.
    14. Paavola, Aleksi & Voutilainen, Ville, 2024. "Central bank collateral policy and credit pricing: Evidence from Finland," Bank of Finland Research Discussion Papers 7/2024, Bank of Finland.
    15. Kazuhiro Takino, 2022. "The impact of non-cash collateralization on the over-the-counter derivatives markets," Review of Derivatives Research, Springer, vol. 25(2), pages 137-171, July.

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    More about this item

    Keywords

    Collateral; Haircut; Central Bank; Money market;
    All these keywords.

    JEL classification:

    • 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
    • G01 - Financial Economics - - General - - - Financial Crises
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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