Real Effects of Financial Market Integration: Evidence from an ECB Collateral Framework Change

54 Pages Posted: 18 Nov 2021 Last revised: 20 Jul 2022

See all articles by Pia Hüttl

Pia Hüttl

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin

Matthias Kaldorf

University of Cologne

Multiple version iconThere are 2 versions of this paper

Date Written: July 12, 2022

Abstract

This paper studies the effects of harmonizing collateral policy in a monetary union. In 2007, the European Central Bank replaced national collateral lists with a single list specifying which assets euro area banks can pledge as collateral. Banks holding newly eligible assets experience a reduction in their cost of funding and increase loan supply compared to banks without such assets. The effect is driven by core banks increasing credit supply to riskier and less productive firms located in periphery countries. These firms in turn experience growth in employment and investment. Our results suggest that a harmonized collateral framework facilitates cross-border lending to borrowing-constrained firms and, thereby, increases financial market integration in a monetary union.

Keywords: Collateral Policy, Bank Lending Channel, Financial Integration, Banking Union, Real Effects

JEL Classification: E44, E52, E58, G20, G21

Suggested Citation

Hüttl, Pia and Kaldorf, Matthias, Real Effects of Financial Market Integration: Evidence from an ECB Collateral Framework Change (July 12, 2022). Available at SSRN: https://ssrn.com/abstract=3963809 or http://dx.doi.org/10.2139/ssrn.3963809

Pia Hüttl (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Matthias Kaldorf

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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