Collateral Eligibility of Corporate Debt in the Eurosystem

Abstract

We study the plethora of implications of the Eurosystem collateral framework for corporate bonds. Using data on the evolving collateral eligibility list, we identify the first inclusion date of bonds and issuers. We find that increased supply and demand for pledgeable collateral following eligibility (a) increases activity in the securities lending market, (b) lowers eligible bonds yields, and (c) reduces the liquidity of newly issued bonds, whereas that of older bonds remains unaffected. Thus, corporate bond lending relaxes the constraint of limited collateral supply, thereby improving market cohesion and completeness.

Keywords: Collateral Policy, ECB, Corporate Bonds, Eligibility premium

JEL Classification: G12, G18, G28, E58