Secured and Unsecured Interbank Markets: Monetary Policy, Substitution and the Cost of Collateral

44 Pages Posted: 1 Oct 2019

See all articles by Thibaut Piquard

Thibaut Piquard

Banque de France; Paris School of Economics (PSE)

Dilyara Salakhova

Independent

Date Written: September 2019

Abstract

We study the substitution between secured and unsecured interbank markets. Banks are competitive andsubject to reserve requirements in a corridor rate system with deposit and lending facilities. Banks face counterparty risk in the unsecured market and incur an opportunity cost to pledge collateral. The model provides insights on interest rates, trading volumes and substitution between the two markets. Using transaction data on the Euro money market, we provide new empirical findings that the model accounts for: (i) borrowing banks are active on both markets even when their collateral constraint is not binding, (ii) secured interest rates may fall below the deposit facility rate. We derive and empirically test predictions on how "conventional" and "unconventional" monetary policies impact interbank markets, depending on whether marketable collateral is purchased or not.

Keywords: Monetary Policy, Interbank Markets, Secured and Unsecured Funding

JEL Classification: E42; E52; E58; G21

Suggested Citation

Piquard, Thibaut and Salakhova, Dilyara, Secured and Unsecured Interbank Markets: Monetary Policy, Substitution and the Cost of Collateral (September 2019). Banque de France Working Paper September 2019, WP #730 . Available at SSRN: https://ssrn.com/abstract=3461534 or http://dx.doi.org/10.2139/ssrn.3461534

Thibaut Piquard

Banque de France ( email )

Paris
France

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Dilyara Salakhova (Contact Author)

Independent

No Address Available

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