Safe Asset Shortage and Collateral Reuse

50 Pages Posted: 2 Aug 2022

See all articles by Stephan Jank

Stephan Jank

Deutsche Bundesbank

Emanuel Moench

Frankfurt School of Finance and Management

Michael Schneider

Deutsche Bundesbank; Goethe University Frankfurt

Multiple version iconThere are 3 versions of this paper

Date Written: July 22, 2022

Abstract

The reuse of collateral can support the efficient allocation of safe assets in the financial system. Exploiting a novel dataset, we show that banks substantially increase their reuse of sovereign bonds in response to scarcity induced by Eurosystem asset purchases. While repo rates react little to purchase-induced scarcity when reuse is low, they become increasingly sensitive at high levels of reuse. An elevated reuse rate is also associated with more failures to deliver and a higher volatility of repo rates in the cross-section of bonds. Our results highlight the trade-off between shock absorption and shock amplification effects of collateral reuse.

Keywords: safe assets, government bonds, collateral reuse, rehypothecation, repo market, securities lending

JEL Classification: E4, E5, G1, G2

Suggested Citation

Jank, Stephan and Moench, Emanuel and Schneider, Michael, Safe Asset Shortage and Collateral Reuse (July 22, 2022). SAFE Working Paper No. 355, Available at SSRN: https://ssrn.com/abstract=4179038 or http://dx.doi.org/10.2139/ssrn.4179038

Stephan Jank

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Emanuel Moench

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Michael Schneider (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Goethe University Frankfurt

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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