Scarce Collateral and Bank Reserves

Miquel Faig and Gregory Gagnon

Working Papers from University of Toronto, Department of Economics

Abstract: If collateral for bank loans is scarce and as a result access to secured loans is restricted, the allocation of resources is inefficient. Anticipating future borrowing constraints, individuals over-invest in collateralized types of capital, whereas consumption and investment expenditures are inefficiently low while individuals are borrowing constrained. The dual counterpart of this misallocation of resources is inefficiently low interest rates. In this situation, bank reserves play a positive welfare role by increasing not only bank lending rates, but also, paradoxically, bank deposit rates. As a result, in economies with scarce collateral the optimal reserves requirement ratio is positive.

Keywords: collateral; banking; reserves; borrowing constraint; reserves requirement. (search for similar items in EconPapers)
JEL-codes: E44 E50 G21 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2003-07-11
New Economics Papers: this item is included in nep-cfn
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Journal Article: Scarce collateral and bank reserves (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:tor:tecipa:faig-03-01

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