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Mobile Collateral Versus Immobile Collateral

55 Pages Posted: 3 Aug 2015  

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER)

Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

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Date Written: July 29, 2015

Abstract

The financial architecture prior to the recent financial crisis was a system of mobile collateral. Safe debt, whether government bonds or privately-produced bonds, i.e., asset-backed securities, could be traded, posted as collateral, and rehypothecated, moving to its highest value use. Since the financial crisis, regulatory changes to the financial architecture have aimed to make collateral immobile, most notably with the BIS “liquidity coverage ratio” for banks. In the face of the Lucas critique, how should these policies be evaluated? We evaluate this immobile capital system with reference to a previous regime which had this feature: the U.S. National Banking Era. We find evidence that a system of immobile collateral contributes to scarcity of safe debt and encourages other forms of short term debt to emerge, possibly making the system riskier.

Suggested Citation

Gorton, Gary B. and Muir, Tyler, Mobile Collateral Versus Immobile Collateral (July 29, 2015). Available at SSRN: https://ssrn.com/abstract=2638886 or http://dx.doi.org/10.2139/ssrn.2638886

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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P.O. Box 208200
New haven, CT 06511
United States

HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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