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Collateral, Central Bank Repos, and Systemic Arbitrage


Nyborg, Kjell G; Fecht, Falko; Rocholl, Jörg; Woschitz, Jiri (2016). Collateral, Central Bank Repos, and Systemic Arbitrage. Swiss Finance Institute Research Paper Series 16-66, University of Zurich.

Abstract

Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks’ liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.

Abstract

Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks’ liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:18 November 2016
Deposited On:22 Aug 2023 10:34
Last Modified:06 Mar 2024 14:26
Series Name:Swiss Finance Institute Research Paper Series
Number of Pages:58
OA Status:Green
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.2139/ssrn.2871337
Other Identification Number:merlin-id:15908
  • Content: Published Version
  • Language: English