Collateral Eligibility of Corporate Debt in the Eurosystem
64 Pages Posted: 27 Apr 2020 Last revised: 5 May 2020
Date Written: April 1, 2020
We study how the Eurosystem Collateral Framework for corporate bonds helps the European Central Bank (ECB) fulfill its policy mandate. Using the ECBs eligibility list, we identify the first inclusion date of both bonds and issuers. We find that due to the increased supply and demand for pledgeable collateral following eligibility, (i) securities lending market trading activity increases, (ii) eligible bonds have lower yields, and (iii) the liquidity of newly-issued bonds declines, whereas the liquidity of older bonds is unaffected/improves. Corporate bond lending relaxes the constraint of limited collateral supply, thereby making the market more cohesive and complete. Following eligibility, bond-issuing firms reduce bank debt and expand corporate bond issuance, thus increasing overall debt size and extending maturity.
Keywords: Collateral Policy, ECB, Corporate Bonds, Corporate Debt Structure, Eligibility premium
JEL Classification: G12, G14, G32, E58
Suggested Citation: Suggested Citation