Fire Buys of Central Bank Collateral Assets

35 Pages Posted: 29 Jan 2017

Multiple version iconThere are 2 versions of this paper

Date Written: 2016

Abstract

In times of financial distress, central banks provide unlimited liquidity to avoid fire sales. In response, banks raise their demand for collateral assets, and the short-term scarcity of collateral securities leads to higher prices, the Fire Buy premium. To avoid collateral scarcity, central banks increase the set of eligible collateral assets. However, if the risk-shifting channel is open for these newly eligible securities, banks prefer to pledge them and pay another premium, the Risk-Shifting premium. With the full fixed-income trading book of 26 German banks, I identify each trade of each bank and investigate how unlimited liquidity provision affects collateral prices. Also, I match banks' trades with their balance sheet and show how funding liquidity impacts premia payment. I quantify the Fire Buy premium to be 15.6 bps; and the Risk-Shifting premium on BBB-rated assets to be 65.6 bps.

Keywords: Fire Buy, Risk-Shifting, Haircut Subsidy, ECB, Over-the-Counter Markets

JEL Classification: E41, E44, E58, G11, G14, G15, G21

Suggested Citation

de Roure, Calebe, Fire Buys of Central Bank Collateral Assets (2016). Bundesbank Discussion Paper No. 51/2016. Available at SSRN: https://ssrn.com/abstract=2907586

Calebe De Roure (Contact Author)

Reserve Bank of Australia

65, Martin Place
Sydney, NSW 2000
Australia

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