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Central bank liquidity provision and collateral quality

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  • Koulischer, François
  • Struyven, Daan

Abstract

Should central banks lend against low quality collateral? We characterize efficient central bank collateral policy in a model where a bank borrows from the interbank market or the central bank. Collateral has favorable incentive effects but is costly to transfer to lenders who value the collateral less because of imperfect collateral quality. We show that a fall in the quantity or the quality of the bank’s collateral can increase interest rates in the economy even with a constant policy rate. A looser central bank collateral policy can reduce the spread, alleviate the credit crunch and increase output.

Suggested Citation

  • Koulischer, François & Struyven, Daan, 2014. "Central bank liquidity provision and collateral quality," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 113-130.
  • Handle: RePEc:eee:jbfina:v:49:y:2014:i:c:p:113-130
    DOI: 10.1016/j.jbankfin.2014.08.022
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    Cited by:

    1. Matteo Crosignani & Miguel Faria-e-Castro & Luís Fonseca, 2016. "The (unintended?) consequences of the largest liquidity injection ever," ESRB Working Paper Series 31, European Systemic Risk Board.
    2. Cassola, Nuno & Koulischer, François, 2019. "The collateral channel of open market operations," Journal of Financial Stability, Elsevier, vol. 41(C), pages 73-90.
    3. repec:eee:finsta:v:33:y:2017:i:c:p:226-243 is not listed on IDEAS
    4. F. Koulischer, 2015. "Asymmetric shocks in a currency union: The role of central bank collateral policy," Working papers 554, Banque de France.
    5. Jondeau, Eric & Khalilzadeh, Amir, 2017. "Collateralization, leverage, and stressed expected loss," Journal of Financial Stability, Elsevier, vol. 33(C), pages 226-243.
    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. Marcin Jerzy Michalski & Michael Bowe & Olga Kolokolova, 2016. "Systemic risk, interbank market contagion, and the lender of last resort function," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Combining micro and macro data for financial stability analysis, volume 41 Bank for International Settlements.
    8. repec:eee:finsta:v:33:y:2017:i:c:p:311-330 is not listed on IDEAS
    9. Schmidt, Kirsten, 2019. "Does liquidity regulation impede the liquidity profile of collateral?," Working Paper Series 2256, European Central Bank.
    10. , 2016. "Funding Illiquidity," Working Papers on Finance 1601, University of St. Gallen, School of Finance, revised Sep 2019.
    11. 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, April.
    12. Christophe Blot & Jérôme Creel & Paul Hubert, 2018. "The effect and risks of ECB collateral framework changes," Sciences Po publications info:hdl:2441/4hi059h9n59, Sciences Po.

    More about this item

    Keywords

    Collateral policy; Monetary policy; Liquidity requirements;

    JEL classification:

    • 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
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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