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The Collateral Trap

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  • Frédéric Boissay
  • Russell Cooper

Abstract

Active wholesale financial markets help reallocate deposits across heterogeneous banks. Because of incentive problems these flows are constrained and collateral is needed. The composition of collateral matters. The use of inside assets (loans) creates a “collateral pyramid” in that cash flows from one loan can be pledged to secure another. Through collateral pyramids the financial sector creates safe assets, but at the cost of exposing the economy to systemic panics. Outside collateral (treasuries) serves as foundation of, and stabilises, the pyramid. There is a threshold for the volume of treasuries, below which investors panic and the pyramid collapses.

Suggested Citation

  • Frédéric Boissay & Russell Cooper, 2014. "The Collateral Trap," NBER Working Papers 20703, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20703
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    Cited by:

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    2. Dimitris Malliaropulos & Petros Migiakis, 2018. "Quantitative easing and sovereign bond yields: a global perspective," Working Papers 253, Bank of Greece.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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