Fire buys of central bank collateral assets

Calebe de Roure

No 51/2016, Discussion Papers from Deutsche Bundesbank

Abstract: In times of financial distress, central banks provide unlimited liquidity to avoid fire sales. In response, banks raise their demand for collateral assets, and the short-term scarcity of collateral securities leads to higher prices, the Fire Buy premium. To avoid collateral scarcity, central banks increase the set of eligible collateral assets. However, if the risk-shifting channel is open for these newly eligible securities, banks prefer to pledge them and pay another premium, the Risk-Shifting premium. With the full fixed-income trading book of 26 German banks, I identify each trade of each bank and investigate how unlimited liquidity provision affects collateral prices. Also, I match banks' trades with their balance sheet and show how funding liquidity impacts premia payment. I quantify the Fire Buy premium to be 15.6 bps; and the Risk-Shifting premium on BBB-rated assets to be 65.6 bps.

Keywords: Fire Buy; Risk-Shifting; Haircut Subsidy; ECB; Over-the-Counter Markets (search for similar items in EconPapers)
JEL-codes: E41 E44 E58 G11 G14 G15 G21 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:512016

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