The Power of Collateral: The ECB and Bank Funding Strategies in Crisis

Abstract

The paper engages with an important aspect of the European crisis, the European banks’ reliance on collateralized (repo) market funding, that has received relatively little analytical attention in the scholarship on the European financial and sovereign debt crisis. The paper is guided by three overarching questions: (a) how do theories of central banking during crisis conceptualize the importance of collateral ? (b) how can the analytical integration of geographies of collateralized bank funding contribute to the political economy of bank-based crisis interventions? (c) what are the political and institutional implications of exit strategies through the lens of collateral? The paper argues that the short-term nature of collateral management, in particular the key role that perceptions of collateral quality play in European banks’ demand for sovereign bonds, is at odds with bank-based liquidity injections (LTROs) that implicitly rely on private banks to preserve the role of sovereign bonds as marketable collateral during times of market distress. The European institutional architecture lack mechanisms to stabilize bank funding markets because of the constraints on the ECB’s ability to intervene in markets for collateral, in the Eurozone mainly sovereign bond markets, with further damaging consequences for sovereign funding conditions and the future of the European project.

Keywords: unconventional monetary policies, European Central Bank, repo market funding, LTROs, marketable collateral, sovereign bond crisis

JEL Classification: E58, E42, E52, E63, E65, G21