The collateral channel of open market operations

We propose a model of collateral choice by banks to quantify how changes in the haircut policy of the central bank affect the collateral used by banks and the funding cost of banks. We estimate the model using data on assets pledged to the European Central Bank from 2009 to 2011. Our results suggest...

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Bibliographic Details
Published in:Journal of financial stability 2019-04, Vol.41, p.73-90
Main Authors: Cassola, Nuno, Koulischer, François
Format: Article
Language:English
Subjects:
Central Bank
Collateral
Haircut
Money market
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Summary:We propose a model of collateral choice by banks to quantify how changes in the haircut policy of the central bank affect the collateral used by banks and the funding cost of banks. We estimate the model using data on assets pledged to the European Central Bank from 2009 to 2011. Our results suggest that an increase in the haircut on low rated collateral by 5 percentage points would have reduced the use of this collateral by 10% but would have increased the average funding cost spread between high yield and low yield countries by 5% over our sample period.
ISSN:1572-3089
1878-0962
DOI:10.1016/j.jfs.2019.03.002