Collateral policy surprises

Central bank collateral policy specifies which assets banks can pledge as collateral to obtain central bank funding and is an important determinant of liquidity in the banking system. We propose a high-frequency identification approach to study the systematic effects of central bank collateral policy on banks, financial markets, and asset prices. We identify collateral policy surprises using intraday bank stock price changes around Eurosystem collateral policy announcements. Expansionary collateral policy surprises lead to excess returns of bank stocks, a decline in common volatility measures, and a reduction in bank default risk, in particular for riskier banks. They also compress core-periphery government bond spreads, even for policy changes that are unrelated to the collateral treatment of government bonds. The uneven transmission of collateral policy through banks to sovereign bond markets is distinct from both central bank asset purchases and conventional monetary policy.