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Central bank collateral, asset fire sales, regulation and liquidity

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  • Bindseil, Ulrich

Abstract

This paper analyses the potential roles of bank asset fire sales and recourse to central bank credit to ensure banks' funding liquidity and solvency. Both asset liquidity and central bank haircuts are modelled as power functions within the unit interval. Funding stability is captured as strategic bank run game in pure strategies between depositors. Asset liquidity, the central bank collateral framework and regulation determine jointly the ability of the banking system to deliver maturity transformation and financial stability. The model also explains why banks tend to use the least liquid eligible assets as central bank collateral and why a sudden non-anticipated reduction of asset liquidity, or a tightening of the collateral framework, can destabilize short term liabilities of banks. Finally, the model allows discussing how the collateral framework can be understood, beyond its essential aim to protect the central bank, as financial stability and non-conventional monetary policy instrument. JEL Classification: E42, G21

Suggested Citation

  • Bindseil, Ulrich, 2013. "Central bank collateral, asset fire sales, regulation and liquidity," Working Paper Series 1610, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20131610
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    Citations

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    Cited by:

    1. Cassola, Nuno & Koulischer, François, 2016. "The collateral channel of open market operations," Working Paper Series 1906, European Central Bank.
    2. Hałaj, Grzegorz, 2018. "Agent-based model of system-wide implications of funding risk," Working Paper Series 2121, European Central Bank.
    3. Koulischer, François & Struyven, Daan, 2014. "Central bank liquidity provision and collateral quality," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 113-130.
    4. repec:eee:phsmap:v:503:y:2018:i:c:p:1151-1181 is not listed on IDEAS
    5. Jean Barthélémy & Vincent Bignon & Benoît Nguyen, 2017. "Illiquid Collateral and Bank Lending during the European Sovereign Debt Crisis," EconomiX Working Papers 2017-21, University of Paris Nanterre, EconomiX.
    6. 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.
    7. Bachmann, Manuel, 2018. "Market Illiquidity, Credit Freezes and Endogenous Funding Constraints," Department of Economics Working Paper Series 5965, WU Vienna University of Economics and Business.
    8. Manuel Bachmann, 2018. "Market Illiquidity, Credit Freezes and Endogenous Funding Constraints," Department of Economics Working Papers wuwp255, Vienna University of Economics and Business, Department of Economics.

    More about this item

    Keywords

    asset liquidity; bank run; central bank collateral framework; liquidity regulation; unconventional monetary policy;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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