Asset Liquidity, Central Bank Collateral, and Banks’ Liability Structure

44 Pages Posted: 9 Oct 2017 Last revised: 11 Oct 2017

See all articles by Ulrich Bindseil

Ulrich Bindseil

European Central Bank (ECB)

Georgiana Dragu

European Central Bank (ECB)

Alexander Düring

European Central Bank

Julian von Landesberger

European Central Bank (ECB)

Date Written: October 9, 2017

Abstract

This paper analyses the roles of bank asset fire sales and recourse to the central bank as lender of last resort for the equilibrium debt structure of banks and the spread between bank lending rates and the central bank policy rate (the short term risk free rate). The asset side of banks is modelled in three variants, including without previously applied constraints on the functional form of asset liquidity and central bank collateral haircuts. The model allows capturing how asset liquidity and the central bank collateral framework interact and determine funding market access of banks and the ability of banks to undertake liquidity and term transformation, which impacts also on monetary conditions. Moreover, the paper provides a cross-section analysis of liquidity properties and central bank collateral haircuts of the euro area fixed income universe.

Keywords: Asset Liquidity, LOLR, Bank Run, Central Bank Collateral Framework, Unconventional Monetary Policy

JEL Classification: E42, G58, G33

Suggested Citation

Bindseil, Ulrich and Dragu, Georgiana and Düring, Alexander and von Landesberger, Julian, Asset Liquidity, Central Bank Collateral, and Banks’ Liability Structure (October 9, 2017). Available at SSRN: https://ssrn.com/abstract=3049792 or http://dx.doi.org/10.2139/ssrn.3049792

Ulrich Bindseil

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Georgiana Dragu (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alexander Düring

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Julian Von Landesberger

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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