Collateral management in central bank policy operations
In order to achieve their monetary policy goals central banks must interact with wider financial markets through money market operations.Â Operations where the central bank provides reserves to the market through the means of a loan potentially leaves the central bank exposed to the risk of loss should the counterparty be unable to repay.Â As losses can lead to the central bank's reputation and independence being compromised, it is important that central banks undertake steps to protect themselves.Â Risk management in central bank operations is therefore crucial to the central bank's ability to effectively implement its policy goals. In this handbook we outline how a central bank can limit its exposure to the risk of loss when conducting money market operations.Â We review the need for operations, discuss the form of such operations and distinguish the contrasting challenges facing countries with surpluses or shortages of liquidity.Â We then discuss the channels through which the central bank is exposed to the risk of loss and look at the role of capital on a central bank's balance sheet.Â We introduce the concept of collateralised lending and detail the means through which a central bank chooses the types of collateral it is willing to accept.Â Subsequently we examine how the central bank manages the collateral it has accepted in its operations, introducing the concepts of valuation, haircuts and margin calls.Â The recent financial market crisis has let central banks to consider whether or not they should change their collateral policies in the face of market stress, we look at both the advantages and risks of such a move.Â
|This book is provided by Centre for Central Banking Studies, Bank of England in its series Handbooks with number 31 and published in 2012.|
|Contact details of provider:|| Postal: Threadneedle Street, London, EC2R 8AH|
Phone: +44 (020) 7601 4444
Fax: +44 (020) 7601 4771
Web page: http://www.bankofengland.co.uk/education/Pages/ccbs/default.aspx
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Baumeister, Christiane & Liu, Philip & Mumtaz, Haroon, 2010. "Changes in the transmission of monetary policy: evidence from a time-varying factor-augmented VAR," Bank of England working papers 401, Bank of England.
- Garreth Rule, 2011. "Issuing central bank securities," Handbooks, Centre for Central Banking Studies, Bank of England, edition 1, number 30.
- Andrew P. Blake & Tatiana Kirsanova, 2008.
"Inflation-Conservatism and Monetary-Fiscal Policy Interactions,"
0801, Exeter University, Department of Economics.
- Andrew P. Blake & Tatiana Kirsanova, 2011. "Inflation Conservatism and Monetary-Fiscal Policy Interactions," International Journal of Central Banking, International Journal of Central Banking, vol. 7(2), pages 41-83, June.
- Joyce, Michael & Lasaosa, Ana & Stevens , Ibrahim & Tong, Matthew, 2010. "The financial market impact of quantitative easing," Bank of England working papers 393, Bank of England.
- Blake, Andrew P. & Zampolli, Fabrizio, 2011. "Optimal policy in Markov-switching rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1626-1651, October.
- Blake, Andy & Gondat-Larralde, Celine, 2010. "Chief Economists' Workshop: state-of-the-art modelling for central banks," Bank of England Quarterly Bulletin, Bank of England, vol. 50(3), pages 214-218.
- Blake, Andy & Kirsanova, Tatiana & Yates, Tony, 2011. "The gains from delegation revisited: price-level targeting, speed-limit and interest rate smoothing policies," Bank of England working papers 415, Bank of England.
When requesting a correction, please mention this item's handle: RePEc:ccb:hbooks:31. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maria Brady)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.