Safe Asset Scarcity and Re-use in the European Repo Market

Justus Inhoffen and Iman Lelyveld
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Justus Inhoffen: Vrije Universiteit Amsterdam

No 24-018/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We construct the first measure of collateral re-use at the bank and bond level for the European repo market using a regulatory transaction dataset. We show that banks materially increase the rate of re-use in response to tightened asset scarcity induced by the Eurosystem's asset purchase program. We find that dealers accommodate clients' demand for safe assets rather than liquidity and profit from the repo rate spread. Yet, dealers also re-use collateral to source liquidity which exposes them to collateral runs. Our results contribute to the policy debate on trade-offs between shock absorption and financial stability risks of collateral re-use.

Keywords: collateral reuse; rehypothecation; safe assets; scarcity; repo market (search for similar items in EconPapers)
JEL-codes: E4 E5 G1 G2 (search for similar items in EconPapers)
Date: 2024-03-20
New Economics Papers: this item is included in nep-eec
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Related works:
Working Paper: Safe Asset Scarcity and Re-use in the European Repo Market (2023)
Working Paper: Safe Asset Scarcity and Re-use in the European Repo Market (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20240018

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