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...

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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
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description 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.
doi_str_mv 10.1016/j.jbankfin.2014.08.022
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source International Bibliography of the Social Sciences (IBSS); Elsevier
subjects Bank liquidity
Central banks
Collateral
Collateral policy
Credit
Financial services
Interest rates
Liquidity
Liquidity requirements
Monetary policy
Policy analysis
Studies
title Central bank liquidity provision and collateral quality
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