Cross-Border Asset Pledgeability for Enhanced Financial Stability
Choi, G. P. 2020. Cross-Border Asset Pledgeability for Enhanced Financial Stability. East Asian Economic Review: 24. 89-124.
36 Pages Posted: 7 Oct 2019 Last revised: 1 Apr 2020
Date Written: March 20, 2020
Even with the sizable Foreign Exchange (FX) holdings and good credit ratings of its top assets, Asia remains vulnerable to various shocks. This paper highlights the limited crossborder asset pledgeability as a significant factor for the lingering vulnerability in Asia. The dichotomy in asset holdings between pledgeable FX and non-pledgeable domestic assets in major economies in Asia has been the source of increasing stabilization costs as well as weakened market momentum in the region. Specifically, the peculiar feature of asset holdings in Asia reflects seriously deficient cross-border asset pledgeability that is left unaddressed. Asset pledgeability contributes toward financial stability via three channels: 1) capital market development by recognizing the role of collateral, 2) increased shock absorption capacity via collateral management, 3) and the newly activated safe asset provision. Therefore, it is crucial to go beyond the usual market development strategy and expand the overall asset pledgeability in the region that has remained unduly depressed.
Keywords: Cross-Border Collateral, Asset Pledgeability, Safe Asset Shortage, Financial Stability, PVAR (Panel Vector Autoregression), Haircut
JEL Classification: E40, E44, E50, F30, F34, G15
Suggested Citation: Suggested Citation