Central bank liquidity provision and collateral quality

Should central banks lend against low quality collateral? We characterize efficient central bank collateral policy in a model where a bank borrows from the interbank market or the central bank. Collateral has favorable incentive effects but is costly to transfer to lenders who value the collateral l...

Full description

Saved in:
Bibliographic Details
Published in:Journal of banking & finance 2014-12, Vol.49, p.113-130
Main Authors: Koulischer, François, Struyven, Daan
Format: Article
Language:English
Subjects:
Bank liquidity
Central banks
Collateral
Collateral policy
Credit
Financial services
Interest rates
Liquidity
Liquidity requirements
Monetary policy
Policy analysis
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Should central banks lend against low quality collateral? We characterize efficient central bank collateral policy in a model where a bank borrows from the interbank market or the central bank. Collateral has favorable incentive effects but is costly to transfer to lenders who value the collateral less because of imperfect collateral quality. We show that a fall in the quantity or the quality of the bank’s collateral can increase interest rates in the economy even with a constant policy rate. A looser central bank collateral policy can reduce the spread, alleviate the credit crunch and increase output.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2014.08.022