IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/11663.html
   My bibliography  Save this paper

Collateral, Central Bank Repos, and Systemic Arbitrage

Author

Listed:
  • Fecht, Falko
  • Nyborg, Kjell G
  • Rocholl, Jorg
  • Woschitz, Jiri

Abstract

Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks' liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.

Suggested Citation

  • Fecht, Falko & Nyborg, Kjell G & Rocholl, Jorg & Woschitz, Jiri, 2016. "Collateral, Central Bank Repos, and Systemic Arbitrage," CEPR Discussion Papers 11663, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11663
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11663
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jakob Eberl & Christopher Weber, 2014. "ECB Collateral Criteria: A Narrative Database 2001–2013," ifo Working Paper Series 174, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Abbassi, Puriya & Bräuning, Falk & Fecht, Falko & Peydró, José-Luis, 2014. "Cross-border liquidity, relationships and monetary policy: Evidence from the Euro area interbank crisis," Discussion Papers 45/2014, Deutsche Bundesbank.
    3. King, Gary & Roberts, Margaret E., 2015. "How Robust Standard Errors Expose Methodological Problems They Do Not Fix, and What to Do About It," Political Analysis, Cambridge University Press, vol. 23(2), pages 159-179, April.
    4. Ewerhart, Christian & Tapking, Jens, 2008. "Repo markets, counterparty risk and the 2007/2008 liquidity crisis," Working Paper Series 909, European Central Bank.
    5. Itamar Drechsler & Thomas Drechsel & David Marques-Ibanez & Philipp Schnabl, 2016. "Who Borrows from the Lender of Last Resort?," Journal of Finance, American Finance Association, vol. 71(5), pages 1933-1974, October.
    6. Gabrieli, Silvia & Georg, Co-Pierre, 2014. "A network view on interbank market freezes," Discussion Papers 44/2014, Deutsche Bundesbank.
    7. Bindseil, Ulrich, 2014. "Monetary Policy Operations and the Financial System," OUP Catalogue, Oxford University Press, number 9780198716907.
    8. William R. Cline, 2014. "Managing the Euro Area Debt Crisis," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 6871, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nyborg, Kjell G., 2017. "Central bank collateral frameworks," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 198-214.
    2. Nyborg, Kjell G., 2017. "Reprint of: Central bank collateral frameworks," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 232-248.
    3. Fuhrer, Lucas Marc & Müller, Benjamin & Steiner, Luzian, 2017. "The Liquidity Coverage Ratio and security prices," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 292-311.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nyborg, Kjell G., 2017. "Central bank collateral frameworks," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 198-214.
    2. Bindseil, Ulrich & Corsi, Marco & Sahel, Benjamin & Visser, Ad, 2017. "The Eurosystem collateral framework explained," Occasional Paper Series 189, European Central Bank.
    3. Nyborg, Kjell G., 2017. "Reprint of: Central bank collateral frameworks," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 232-248.
    4. 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.
    5. Cassola, Nuno & Koulischer, François, 2019. "The collateral channel of open market operations," Journal of Financial Stability, Elsevier, vol. 41(C), pages 73-90.
    6. Silvia Gabrieli & Claire Labonne, 2018. "Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015," Working papers 687, Banque de France.
    7. Caballero, Diego & Lucas, André & Schwaab, Bernd & Zhang, Xin, 2020. "Risk endogeneity at the lender/investor-of-last-resort," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 283-297.
    8. Abbassi, Puriya & Bräuning, Falk & Schulze, Niels, 2017. "Bargaining power and outside options in the interbank lending market," Discussion Papers 31/2017, Deutsche Bundesbank.
    9. Garcia-de-Andoain, Carlos & Heider, Florian & Hoerova, Marie & Manganelli, Simone, 2016. "Lending-of-last-resort is as lending-of-last-resort does: Central bank liquidity provision and interbank market functioning in the euro area," Journal of Financial Intermediation, Elsevier, vol. 28(C), pages 32-47.
    10. Podlich, Natalia & Schnabel, Isabel & Tischer, Johannes, 2017. "Banks' trading after the Lehman crisis: The role of unconventional monetary policy," Discussion Papers 19/2017, Deutsche Bundesbank.
    11. Cheung, Yin-Wong & Steinkamp, Sven & Westermann, Frank, 2020. "Capital flight to Germany: Two alternative measures," Journal of International Money and Finance, Elsevier, vol. 102(C).
    12. Gabriella Chiesa, 2020. "Safe Assets, Credit Provision and Debt Management," Open Economies Review, Springer, vol. 31(3), pages 637-667, July.
    13. de Roure, Calebe, 2016. "Fire buys of central bank collateral assets," Discussion Papers 51/2016, Deutsche Bundesbank.
    14. Aitor Erce, 2015. "Bank and sovereign risk feedback loops," Globalization Institute Working Papers 227, Federal Reserve Bank of Dallas.
    15. S. Gabrieli & C.-P. Georg, 2014. "A network view on interbank market freezes," Working papers 531, Banque de France.
    16. Acharya, Viral & Pierret, Diane & Steffen, Sascha, 2016. "Lender of last resort versus buyer of last resort: The impact of the European Central Bank actions on the bank-sovereign nexus," ZEW Discussion Papers 16-019, ZEW - Leibniz Centre for European Economic Research.
    17. Bernardo Bravo-Benitez & Biliana Alexandrova-Kabadjova & Serafin Martinez-Jaramillo, 2016. "Centrality Measurement of the Mexican Large Value Payments System from the Perspective of Multiplex Networks," Computational Economics, Springer;Society for Computational Economics, vol. 47(1), pages 19-47, January.
    18. van de Leur, Michiel C.W. & Lucas, André & Seeger, Norman J., 2017. "Network, market, and book-based systemic risk rankings," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 84-90.
    19. Harald Uhlig, 2014. "Sovereign Default Risk and Banks in a Monetary Union," German Economic Review, Verein für Socialpolitik, vol. 15(1), pages 23-41, February.
    20. van der Kwaak, Christiaan, 2017. "Financial Fragility and Unconventional Central Bank Lending Operations," Research Report 17005-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

    More about this item

    Keywords

    banks; central bank; Collateral; collateral policy; financial fragmentation; financial stability; interbank market; liquidity; repo; systemic arbitrage;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:11663. 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: . General contact details of provider: https://www.cepr.org .

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.