Collateral damage

Gary Gorton and Toomas Laarits

Financial Stability Review, 2018, issue 22, 73-82

Abstract: A financial crisis is an event in which the holders of short-term debt come to question the collateral backing that debt. So, the resiliency of the financial system depends on the quality of that collateral. The authors show that there is a shortage of high-quality collateral by examining the convenience yield on short-term debt, which summarises the supply and demand for short-term safe debt, taking into account the availability of high-quality collateral. They then show how the private sector has responded by issuing more (unsecured) commercial paper at shorter maturities. The results suggest that there is a shortage of safe debt now compared to the pre-crisis period, implying that the seeds for a new shadow banking system to grow exist.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:fisrev:2018:22:7

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