Collateral Eligibility of Corporate Debt in the Eurosystem

Abstract

We study how the Eurosystem Collateral Framework for corporate bonds helps the European Central Bank (ECB) fulfill its policy mandate. Using the ECBs eligibility list, we identify the first inclusion date of both bonds and issuers. We find that due to the increased supply and demand for pledgeable collateral following eligibility, (i) securities lending market trading activity increases, (ii) eligible bonds have lower yields, and (iii) the liquidity of newly-issued bonds declines, whereas the liquidity of older bonds is una↵ected/improves. Corporate bond lending relaxes the constraint of limited collateral supply, thereby making the market more cohesive and complete. Following eligibility, bond-issuing firms reduce bank debt and expand corporate bond issuance, thus increasing overall debt size and extending maturity.

Pledgeability and Asset Prices: Evidence from the Chinese Corporate Bond Markets

“…Based on market reactions of bonds that were rejected by the program (which might carry some additional information other than pledgeability), they find that an increase in the haircut from 0 to 100% would result in an increase of 28 to 52 bps in bond yields. Pelizzon, Riedel, Simon, and Marti (2019) also find a somewhat smaller estimate-13 to 59 bps decrease in yields for a 100% drop in haircut-by exploiting the haircut reduction resulting from a corporate bond's inclusion into the European Central Bank's eligible list of collateral for its open market operations. 3 Our paper is different because Chinese enterprise bonds are dual listed and our setting has two control groups-one with higher credit quality than the treatment group and another with lower.…”

“…For instance, the lower bound effect of rejection by the TALF is estimated to be around 20 bps; but because the TALF rejection essentially raised the bond haircut by 75% (25% to 100%), the effect of a 100% rise in haircut should be around 28 bps. Similarly, we have also scaled the lower and upper bounds of the estimates using the haircut schedule of assets eligible for the use as collateral in Eurosystem market operations inPelizzon et al (2019), who find that the average yield reaction to be 11-24 bps for lendable bonds and 30-50 bps for non-lendable bonds.…”

Climate change, central banking and financial supervision: beyond the risk exposure approach

“…One of the reasons for this is thatas recent empirical evidence has shownthose bonds that are included in collateral framework and central bank asset purchases exhibit lower yields and the companies that issue these bonds seem to increase bond issuance, employment and investment (e.g. Giambona et al, 2020;Luck and Zimmerman, 2020;Nguyen, 2020;Pelizzon et al, 2020;Todorov, 2020).…”

The Rise of Bond Financing in Europe

“…Pelizzon et al [2019] provide evidence that the inclusion of an asset in the Eurosystem's list for eligible collateral directly affects its secondary market liquidity and yield. In the United States the Federal Reserve has also started to conduct direct corporate bond purchases for the first time in its history.ECB Working Paper Series No 2663 / May 2022…”

“…See for instance[Denis and Mihov, 2003, Faulkender and Petersen, 2006, Hale and Santos, 2008, Rauh and Sufi, 2010.4 Other works studying the link between bond markets and monetary policy includeArce et al [2018],Ertan et al [2019],Giambona et al [2020], Todorov [2020],Becker and Ivashina [2014],Lhuissier and Szczerbowicz [2018],Elliott et al [2019],Kashyap et al [1996],Bolton and Freixas [2006] Becker and Ivashina [2015],Bubeck et al [2020]. and Di Maggio andKacperczyk [2017] also highlight the role of reach for yield, whilePelizzon et al [2019] shows the role of collateral eligibility on European corporate bond markets Crouzet [2019],Holm-Hadulla and Thürwächter [2020]. and study the impact of the bond market shift on monetary policy transmission.ECB Working Paper Series No 2663 / May 2022…”