Collateral Scarcity and Market Functioning: Insights from the Eurosystem Securities Lending Facilities

Abstract

We utilize the Eurosystem securities lending facilities as a laboratory to investigate
the impact of collateral scarcity on market functioning. The reduction of securities
lending fees, implemented in November 2020, provides a natural experiment for our
analyses. This policy change results in a surge in the utilization of securities lending
facilities, particularly for bonds with limited supply elasticity in the repo market.
We find no evidence of substitution effects; instead, the overall activity in the repo
market expands through the collateral multiplier. The improved pricing conditions
alleviate collateral scarcity and enhance market quality in both the repo and cash
markets.

Keywords: safe assets, collateral scarcity, monetary policy, quantitative easing, securities lending facilities, repo, market functioning

JEL Classification: G10, G21, E50, E58