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Collateral requirements in central bank lending

Chuan Du ()
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Chuan Du: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 987, Bank of England working papers from Bank of England

Abstract: In periods of stress, acute liquidity squeeze can manifest in the riskier segments of the credit market, even amid a surplus of aggregate liquidity. In such scenarios, central bank interventions that directly lower the risky interest rate can be more effective than reductions in the risk-free interest rate. Specifically, the central bank lends to the market at more favourable interest rates while simultaneously reducing the haircuts imposed on eligible collateral. In doing so, the central bank takes on greater credit risk, but achieves an outcome that is more productively efficient than simply reducing the risk-free interest rate.

Keywords: Collateral; leverage; credit conditions; monetary policy; general equilibrium (search for similar items in EconPapers)
JEL-codes: D53 E44 E51 E52 E58 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2022-07-21
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mon and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0987

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