Collateral easing and safe asset scarcity: How money markets benefit from low-quality collateral

Stefan Greppmair, Karol Paludkiewicz and Sascha Steffen

No 20/2025, Discussion Papers from Deutsche Bundesbank

Abstract: We show that central bank lending against lower quality collateral can improve conditions in the repo market. For identification we take advantage of a pandemic- related temporary extension of the collateral framework of the European Central Bank (ECB), which allows banks to pledge previously ineligible credit claims as collateral for refinancing operations. We use a difference-in-differences approach and exploit banks that do not mobilize credit claims ex ante as a control group. We find that banks affected by the temporary extension pledge newly eligible credit claims in order to reduce the encumbrance of high-quality marketable assets. Treated banks lend out these marketable assets as collateral in the repo market, which helps to alleviate asset scarcity.

Keywords: asset scarcity; money markets; monetary policy; collateral framework (search for similar items in EconPapers)
JEL-codes: E43 E44 E58 G21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:324664

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