Liquidity, Collateral Quality and Interest Rate

Jung-Hyun Ahn, Vincent Bignon, Régis Breton () and Antoine Martin ()
Additional contact information
Régis Breton: Banque de France, https://www.banque-france.fr/fr/regis-breton
Antoine Martin: Swiss National Bank, https://ch.linkedin.com/in/antoine-martin-2604b81

No 2502, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: This paper analyzes how collateral quality shocks affect banks’ liquidity management and the risk-free rate. We develop a model where banks manage liquidity through near-cash assets and marketable securities subject to idiosyncratic and/or aggregate shocks. Collateral quality deterioration leads to non-monotonic changes in liquidity holdings: moderate declines reduce cash holdings via lower market returns, while severe declines cause precautionary hoarding and market freezes. Reduced collateral quality depresses the risk-free rate. Policy interventions, including liquidity regulation and negative interest rate policies can mitigate these effects. Our findings highlight the risks of collateral quality shocks and the importance of policy complementarities in addressing liquidity issues.

Keywords: interbank market; risk-free rate; collateral; liquidity regulation; negative interest rate; cash-hoarding. (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2025-01
New Economics Papers: this item is included in nep-cba and nep-mon
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Related works:
Working Paper: Liquidity, Collateral Quality and Interest Rate (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:2502

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