Safe asset scarcity, collateral reuse, and market functioning

Stephan Jank, Emanuel Moench and Michael Schneider

No 16439, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Quantitative easing contributes to safe asset scarcity and repo market specialness. We show that banks respond to scarcity induced by Eurosystem bond purchases by increasing their reuse of these bonds as collateral. While reuse is low, additional reuse dampens scarcity effects. However, repo rates become increasingly sensitive to asset purchases when reuse is high. Elevated reuse also impairs market functioning: it leads to more failures to deliver specific bonds, a higher volatility of repo rates and more pronounced mispricing in the cash bond market. Our results highlight a trade-off between the shock absorption and shock amplification effects of collateral reuse.

Keywords: Safe assets; Government bonds; Collateral reuse; Rehypothecation; Repo market; Securities lending (search for similar items in EconPapers)
JEL-codes: E4 E5 G1 G2 (search for similar items in EconPapers)
Date: 2022-06
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