Does a Larger Menu Increase Appetite? Collateral Eligibility and Bank Risk-Taking

Climate change challenges for central banks and financial regulators

“…90 Being included in the collateral framework gives an incentive to issue such financial instruments in larger quantities, which could in turn have an impact on the economy. 91,92 Central banks could therefore consider incorporating climate-related risks explicitly in determining the list of eligible collateral and the size of the haircut.…”

Policy uncertainty, lender of last resort and the real economy

“…This paper complements existing work on the effect of central bank policies related to the vLTRO. Existing papers focus on the vLTRO liquidity uptake (Andrade et al, 2018) or on the relaxation of the collateral rules concomitant with the vLTRO (e.g., Cahn et al, 2018;van Bekkum et al, 2018;Carpinelli and Crosignani, 2018) and provide evidence of its effect on the lending in a number of countries. 8 We show that the lengthening of the maturity of central bank liquidity can affect bank lending independently of the relaxation of the collateral rules.…”

“…10 8 At the time of the vLTRO, the ECB (i) reduced the rating threshold for certain asset-backed securities and (ii) allowed national central banks, as a temporary solution, to accept as collateral additional performing credit claims that satisfy specific eligibility criteria. van Bekkum et al (2018) exploit the lowering of the rating requirement for eligible residential mortgage-backed securities in the Netherlands. Carpinelli and Crosignani (2018) explore the introduction of a regulatory intervention by the Italian government that allowed banks to "manufacture" collateral by guaranteeing securities, such as retained bank own bonds, otherwise ineligible at the ECB.…”

The (Unintended?) Consequences of the Largest Liquidity Injection Ever

“…On a less positive note, van der Kwaak (2015) and Corbisiero (2016) build general equilibrium models and find that the effect on output is essentially zero. van Bekkum et al (2016) show that the eligibility of risky collateral caused increased credit supply to riskier households in the Netherlands. Instead of studying private credit supply, we focus on holdings of risky securities that can then be pledged at the central bank, in particular domestic government bonds.…”