The Interest of Being Eligible

Abstract

Major central banks accept nonmarketable assets, such as pooled individual corporate loans, as collateral in their refinancing operations with banks. Such “eligible” loans to firms may provide a liquidity service to the banks which originate them. Banks may in turn pass on a part of this benefit to their borrowers in the form of a reduced interest rate: the eligibility discount. We exploit a surprise extension of the Eurosystem's set of eligible collateral to medium‐quality corporate loans, the Additional Credit Claims (ACC) program of February 2012, to assess the eligibility discount to corporate loans spreads in France. We find that becoming eligible to the Eurosystem's collateral framework translates into a relative reduction in rates by 8 bps for new loans issued to ACC‐eligible firms , controlling for loan‐, firm‐, and bank‐level characteristics. We find that this collateral channel of monetary policy is only active for the banks which have a lower opportunity cost in pledging credit claims and which are well‐capitalized.

Lost in Negative Territory? Search for Yield!

“…The Banque de France uses it to compute quarterly statistics on the interest rates of new loan contracts and to estimate usury interest rates. To our knowledge, this data set has been used for academic research purposes only by Mésonnier et al (2022). All main credit institutions report exhaustive information for all new individual loans from their reporting branches.…”

“…Sample Construction and Summary Statistics. We construct our loan-level sample employing a cleaning strategy similar to that adopted by Mésonnier et al (2022). The raw M-Contran data set reports tranches of multitranches loans as independent observations.…”

The Preferential Treatment of Green Bonds

“…The slope of the liquidity management cost function is calibrated to l 0 = 0.004, matching the collateral service premium in the data. We target the point estimate of -7bp from Pelizzon et al (2020) and Mésonnier et al (2020). 18 The model implied collateral service premium is given by the yield differential of the traded bond and a synthetic bond that is not eligible in period t, corresponding to the identification strategy of Pelizzon et al (2020).…”

“…Given the log-utility assumption on consumption, 18 Using the ECB list of collateral eligible for main refinancing operations, Pelizzon et al ( 2020) identify a collateral premium of -7bp. Mésonnier et al (2020) also identify an eligibility premium of -7b using a surprise relaxation of eligibility criteria prior to the ECB's additional credit claims program. 19 We also look at welfare gains conditionally on being at the baseline steady state and thus explicitly considering the transition period to the new steady state.…”

“…Since our focus is on the collateral framework, we employ a financial friction that restricts leverage rather than external financing as in the canonical financial accelerator model ofBernanke et al (1999).3 Collateral premia on corporate bonds have been documented byMésonnier et al (2020),Pelizzon et al (2020), andMota (2020) Kaldorf and Wicknig (2021). provide a structural analysis of collateral premia and corporate default risk.4 Preferential treatment can take the form of relaxed eligibility requirements, reduced haircuts on eligible green bonds, or a combination of both.…”