Collateral, Central Bank Repos, and Systemic Arbitrage

58 Pages Posted: 18 Nov 2016

See all articles by Falko Fecht

Falko Fecht

Frankfurt School of Finance & Management

Kjell G. Nyborg

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

Jörg Rocholl

ESMT European School of Management and Technology

Jiri Woschitz

University of Zurich

Multiple version iconThere are 2 versions of this paper

Date Written: November 17, 2016

Abstract

Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks’ liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.

Keywords: Collateral, repo, systemic arbitrage, central bank, collateral policy, banks, liquidity, interbank market, financial stability, financial fragmentation

JEL Classification: G12, G21, E42, E51, E52, E58

Suggested Citation

Fecht, Falko and Nyborg, Kjell G. and Rocholl, Joerg and Woschitz, Jiri, Collateral, Central Bank Repos, and Systemic Arbitrage (November 17, 2016). Swiss Finance Institute Research Paper No. 16-66. Available at SSRN: https://ssrn.com/abstract=2871337 or http://dx.doi.org/10.2139/ssrn.2871337

Falko Fecht

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Kjell G. Nyborg (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 (0)44 634 2980 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Joerg Rocholl

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin
Germany

HOME PAGE: http://www.esmt.org/en/159244

Jiri Woschitz

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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