Safe Asset Shortage and Collateral Reuse
50 Pages Posted: 2 Aug 2022
Date Written: July 22, 2022
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: Suggested Citation