Collateral, Central Bank Repos, and Systemic Arbitrage

Falko Fecht, Kjell Nyborg, Jörg Rocholl and Jiri Woschitz
Additional contact information
Jörg Rocholl: ESMT European School of Management and Technology
Jiri Woschitz: University of Zurich

No 16-66, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks’ liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.

Keywords: Collateral; repo; systemic arbitrage; central bank; collateral policy; banks; liquidity; interbank market; financial stability; financial fragmentation (search for similar items in EconPapers)
JEL-codes: E42 E51 E52 E58 G12 G21 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2016-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2871337 (application/pdf)

Related works:
Working Paper: Collateral, Central Bank Repos, and Systemic Arbitrage (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1666

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().