Liquidity Provision and Collateral Haircuts in Payments Systems
James Chapman (),
Jonathan Chiu () and
Miguel Molico ()
Bank of Canada Review, 2011, vol. 2011, issue Autumn, 13-20
Central banks play a pivotal role in well-functioning payments systems by providing liquidity via collateralized lending. This article discusses the role of collateral and haircut policy in central bank lending, as well as the distinguishing features of the central bank’s policy relative to private sector practices. It presents a model that explicitly incorporates the unique role of central banks in the payments system and argues that central banks must consider how their haircut policies affect the relative price and liquidity of assets, the market’s asset allocation, and the likelihood of participants to default. Furthermore, under extraordinary circumstances, there is a rationale for the central bank to temporarily reduce haircuts or broaden the list of eligible collateral to mitigate the shortage of liquidity in the market.
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2011/11/chapman.pdf full text (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bca:bcarev:v:2011:y:2011:i:autumn11:p:13-20
Access Statistics for this article
More articles in Bank of Canada Review from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().