Collateral management in central bank policy operations
Garreth Rule ()
in Handbooks from Centre for Central Banking Studies, Bank of England
In order to achieve their monetary policy goals central banks must interact with wider financial markets through money market operations.Â Operations where the central bank provides reserves to the market through the means of a loan potentially leaves the central bank exposed to the risk of loss should the counterparty be unable to repay.Â As losses can lead to the central bank's reputation and independence being compromised, it is important that central banks undertake steps to protect themselves.Â Risk management in central bank operations is therefore crucial to the central bank's ability to effectively implement its policy goals. In this handbook we outline how a central bank can limit its exposure to the risk of loss when conducting money market operations.Â We review the need for operations, discuss the form of such operations and distinguish the contrasting challenges facing countries with surpluses or shortages of liquidity.Â We then discuss the channels through which the central bank is exposed to the risk of loss and look at the role of capital on a central bank's balance sheet.Â We introduce the concept of collateralised lending and detail the means through which a central bank chooses the types of collateral it is willing to accept.Â Subsequently we examine how the central bank manages the collateral it has accepted in its operations, introducing the concepts of valuation, haircuts and margin calls.Â The recent financial market crisis has let central banks to consider whether or not they should change their collateral policies in the face of market stress, we look at both the advantages and risks of such a move.Â
Keywords: Collateral; management; in; central; bank; policy; operations (search for similar items in EconPapers)
JEL-codes: G18 G20 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
http://www.bankofengland.co.uk/education/ccbs/handbooks/pdf/ccbshb31.pdf English version (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.bankofengland.co.uk/education/ccbs/handbooks/pdf/ccbshb31.pdf [301 Moved Permanently]--> https://www.bankofengland.co.uk/education/ccbs/handbooks/pdf/ccbshb31.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:ccb:hbooks:31
Access Statistics for this book
More books in Handbooks from Centre for Central Banking Studies, Bank of England Contact information at EDIRC.
Bibliographic data for series maintained by Maria Brady ().