Central Bank Collateral Frameworks

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute - Zurich

February 15, 2015

Swiss Finance Institute Research Paper No. 15-10

This paper seeks to inform about a feature of monetary policy that is largely overlooked, yet occupies a central role in modern monetary and financial systems, namely central bank collateral frameworks. Their importance can be understood by the observation that the money at the core of these systems, central bank money, is injected into the economy on terms, not defined in a market, but by the collateral frameworks and interest rate policies of central banks. Using the collateral framework of the Eurosystem as a basis of illustration and case study, the paper brings to light the functioning, reach, and impact of collateral frameworks. A theme that emerges is that collateral frameworks may have distortive effects on financial markets and the wider economy. They can, for example, bias the private provision of real liquidity and thereby also the allocation of resources in the economy as well as contribute to financial instability. Evidence is presented that the collateral framework in the euro area promotes risky and illiquid collateral and, more generally, impairs market forces and discipline. The paper also emphasizes the important role of ratings and government guarantees in the Eurosystem’s collateral framework.

Number of Pages in PDF File: 54

Keywords: central bank, banks, collateral, money, liquidity, monetary system, financial system, monetary policy, ratings, guarantees, haircuts, Eurosystem, ECB

JEL Classification: E58, E42, E52, E44, G10, G01, G21

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Date posted: March 26, 2015  

Suggested Citation

Nyborg, Kjell G., Central Bank Collateral Frameworks (February 15, 2015). Swiss Finance Institute Research Paper No. 15-10. Available at SSRN: https://ssrn.com/abstract=2576075 or http://dx.doi.org/10.2139/ssrn.2576075

Contact Information

Kjell G. Nyborg (Contact Author)
University of Zurich - Department of Banking and Finance ( email )
Plattenstrasse 14
Zürich, 8032
+41 (0)44 634 2980 (Phone)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Swiss Finance Institute - Zurich ( email )

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