Collateralized-Uncollateralized Funding Decision in Money Markets

Abstract

Little is known about the factors that affect banks' relative preferences for collateralized and uncollateralized funding. We examine the determinants of the collateralized-uncollateralized funding decision using a unique dataset. We decompose the relative collateralized-uncollateralized funding activity into migrations and co-movements, including the directions of funding flows. Migrations and co-movements depend on various determinants, such as systemic risk, collateral availability and the inter-bank network structure. Interestingly, migrations and co-movements behave differently in periods of high financial stress, because safe assets (used as collateral to reduce counterparty risk) are then no longer perceived as safe as during periods of low-moderate financial stress.

Keywords: Money markets, collateralized funding, uncollateralized funding, systemic risk.

JEL Classification: E41, E51, G01, G21, G28.