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on Banking |
| By: | Ely, Regis Augusto; Tabak, Benjamin Miranda; Teixeira, Anderson Mutter |
| Abstract: | In this article, we analyze the effect of a set of 12 macroprudential policies on the risk-taking of banks using a large number of countries and banks. Our empirical results show that, although on average these policies reduce risk-taking, the effects are quite heterogeneous and vary considerably depending on the instrument implemented, market concentration, size of banks, liquidity, leverage and different levels of risk. Structural policies, such as limits on asset concentration and interbank exposures, are the most effective in terms of financial stability. Borrower based policies, such as loan-to-value and debt-to-income ratios, also have a positive effect on stability. Concentration limits tend to be more effective for larger and more leveraged banks, while loan-to-value and debt-to-income ratios are more effective in concentrated markets. We also show that there seems to be a greater effect through the leverage channel for policies that are most effective in reducing risk-taking. |
| Keywords: | financial stability, macroprudential policies, bank regulation |
| JEL: | G21 G28 L10 |
| Date: | 2019–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:94546&r=all |
| By: | Huizinga, Harry; Laeven, Luc |
| Abstract: | Loan loss provisions in the euro area are negatively related to GDP growth, i.e., they are procyclical. Loan loss provisions tend to be more procyclical at larger and better capitalized banks. The procyclicality of loan loss provisions can explain about two-thirds of the variation of bank capitalization over the business cycle. We estimate that provisioning procyclicality in the euro area is about twice as large as in other advanced economies. This difference reflects a larger procyclicality of provisioning in euro area countries already prior to euro adoption, and the divergent growth experiences of euro area countries following the global financial crisis. JEL Classification: G20 |
| Keywords: | accounting, bank capital, banks, financial regulation, financial stability, loan loss provisioning |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192288&r=all |
| By: | Barasinska, Nataliya; Haenle, Philipp; Koban, Anne; Schmidt, Alexander |
| Abstract: | This paper presents a framework for estimating losses in the residential real estate mortgage portfolios of German banks. We develop an EL model where LGD estimates are based on current collateral values and PD dynamics are estimated using a structural PVAR approach. We confirm empirically that foreclosure rates are rising with the unemployment rate and are inversely related to house price inflation. Being consistent with our expectation that strategic defaults do not play a central role given the full personal liability of German households, the results give broad support for the double-trigger hypothesis of mortgage defaults. In order to analyse the possible credit losses stemming from residential mortgage lending we then use the model to run a top-down stress test and simulate losses on the individual bank level for the years from 2018 to 2020 for the whole German banking sector. Our results show that loss rates in the residential mortgage portfolios of German banks do increase significantly in an adverse economic environment. The estimated expected losses are widely distributed in the banking system leading, on average, to a 0.4 percentage points reduction in the CET1 ratio over the simulation period. |
| Keywords: | residential real estate,mortgages,credit risk,stress testing,German banks |
| JEL: | G01 G17 G21 G28 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:172019&r=all |
| By: | Damar, H. Evren; Gropp, Reint; Mordel, Adi |
| Abstract: | We employ a unique identification strategy linking survey data on household consumption expenditure to bank-level data to estimate the effects of bank funding stress on consumer credit and consumption expenditures. We show that households whose banks were more exposed to funding shocks report lower levels of nonmortgage liabilities. This, however, only translates into lower levels of consumption for low income households. Hence, adverse credit supply shocks are associated with significant heterogeneous effects. |
| Keywords: | credit supply,banking,financial crisis,consumption expenditure,liquid assets,consumption smoothing |
| JEL: | E21 E44 G01 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:112019&r=all |
| By: | Sergio Mayordomo (Banco de España); Antonio Moreno (School of Economics and Business, University of Navarra); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Maria Rodriguez-Moreno (Banco de España) |
| Abstract: | This paper studies the effects of the bank capital requirements imposed by the European authorities in October 2011 on loan collateral and personal guarantees usage to enhance capital ratios. We use detailed information on the loan contracts granted by a representative Spanish bank and several subsidiaries to nonfinancial corporations around that date. We document that personal guarantees usage increases more than that of collateral, especially at subsidiaries with lower capital ratios. However, although the former type of guarantees demonstrably disciplined firms in their risk-taking before 2011, their subsequent overuse may have blunted their impact and may have even undermined firm performance and investment. |
| Keywords: | Banks, Asymmetric Information, Real Guarantees, Personal Guarantees, Risk Taking, Capital Requirements |
| JEL: | D43 E32 G21 G32 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1928&r=all |
| By: | Jérôme Dugast; Semih Üslü; Pierre-Olivier Weill |
| Abstract: | Should regulators encourage the migration of trade from over-the-counter (OTC) to centralized markets? To address this question, we consider a model of equilibrium and socially optimal market participation of heterogeneous banks in an OTC market, in a centralized market, or in both markets at the same time. We find that banks have the strongest private incentives to participate in the OTC market if they have the lowest risk-sharing needs and highest ability to take large positions. These banks endogenously assume the role of OTC market dealers. Other banks, with relatively higher risk-sharing needs and lower ability to take large positions, lie at the margin: they are indifferent between the centralized market and the OTC market, where they endogenously assume the role of customers. We show that more customer bank participation in the centralized market can be welfare improving only if banks are mostly heterogeneous in their ability to take large positions in the OTC market, and if participation costs induce banks to trade exclusively in one market. Empirical evidence suggests that these conditions for a welfare improvement are met. |
| JEL: | G0 G1 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25887&r=all |
| By: | Charles W. Calomiris; Matthew S. Jaremski; David C. Wheelock |
| Abstract: | Liquidity shocks transmitted through interbank connections contributed to bank distress during the Great Depression. New data on interbank connections reveal that banks were much more likely to close when their correspondents closed. Further, after the Federal Reserve was established, banks’ management of cash and capital buffers was less responsive to network liquidity risk, suggesting that banks expected the Fed to reduce that risk. Because the Fed’s presence removed the incentives for the most systemically important banks to maintain capital and cash buffers that had protected against liquidity risk, it likely contributed to the banking system’s vulnerability to contagion during the Depression. |
| JEL: | G21 L14 N22 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25897&r=all |
| By: | Gary B. Gorton |
| Abstract: | Financial crises are bank runs. At root the problem is short-term debt (private money), which while an essential feature of market economies, is inherently vulnerable to runs in all its forms (not just demand deposits). Bank regulation aims at preventing bank runs. History shows two approaches to bank regulation: the use of high quality collateral to back banks’ short-term debt and government insurance for the short-term debt. Also, explicit or implicit limitations on entry into banking can create charter value (an intangible asset) that is lost if the bank fails. This can create an incentive for the bank to abide by the regulations and not take too much risk. |
| JEL: | G2 G21 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25891&r=all |
| By: | Serge Ky (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Clovis Rugemintwari (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Alain Sauviat (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges) |
| Abstract: | Mobile money, a technology-driven innovation in financial services, has profoundly penetrated the financial landscape in Sub-Saharan Africa, including banks. Yet, besides anecdotal evidence, little is known about whether mobile money adoption enhances or worsens bank performance. Combining hand-collected data with balance sheet data from Bankscope for a panel of 170 financial institutions over the period 2009-2015, we find a strong positive and significant relationship between the time elapsed since banks' adoption of mobile money and their performance considering an array of proxies of bank profitability, efficiency and stability. In further investigations, we show how bank specialization and size alter such an association. Our results are robust to using instrumental variables, controlling for bank and macro level confounding factors, bank fixed effects and considering alternative measures of bank performance and mobile money adoption. Furthermore, we show that enhanced income diversification and broadened access to deposits are possible channels through which banks involved in mobile money improve their performance. Overall, our findings highlight the bright side of cooperation between banks and mobile network operators in the provision of mobile money. |
| Keywords: | Fintech,Mobile money,Innovation,Bank performance,East African Community |
| Date: | 2019–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02155077&r=all |
| By: | Langedijk, Sven (European Commission); Fontana, Alessandro (European Insurance and Occupational Pension Authority) |
| Abstract: | We propose a simple model that captures the link between bank and sovereign credit risk. It allows evaluating policy options to address this ‘doom loop’ in which the government may need to raise debt to recapitalise banks, and an increase in government debt raises sovereign risk and in turn generates potential bank losses via their (sovereign) bond holdings. Hence, an initial shock originating either in the banking or sovereign sector is amplified by the feedback relation. We set up a framework based on detailed actual bank balance sheets and test the model on 35 large EU banking groups, across 7 European countries. The effects of the feedback loops in most cases more than double the effect of the initial shock on bank losses and the sovereign risk premium. We show that a single EU bank resolution mechanism, European Stability Mechanism (ESM) direct bank recapitalisations, and bondholder “bail-in” can be effective to dampen the bank-sovereign loop. Addressing the home bias in banks sovereign bond holdings by reducing excessive exposure to domestic sovereigns has only limited benefit in terms of lower crisis doom loop effects as contagion effects increase. |
| Keywords: | Credit Risk, Banks, Sovereign, Financial Stability, ESM, Direct Recapitalisation |
| JEL: | E44 G01 G21 H63 H81 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:201910&r=all |
| By: | Robert Bartlett; Adair Morse; Richard Stanton; Nancy Wallace |
| Abstract: | Discrimination in lending can occur either in face-to-face decisions or in algorithmic scoring. We provide a workable interpretation of the courts’ legitimate-business-necessity defense of statistical discrimination. We then estimate the extent of racial/ethnic discrimination in the largest consumer-lending market using an identification afforded by the pricing of mortgage credit risk by Fannie Mae and Freddie Mac. We find that lenders charge Latinx/African-American borrowers 7.9 and 3.6 basis points more for purchase and refinance mortgages respectively, costing them $765M in aggregate per year in extra interest. FinTech algorithms also discriminate, but 40% less than face-to-face lenders. These results are consistent with both FinTech and non-FinTech lenders extracting monopoly rents in weaker competitive environments or profiling borrowers on low-shopping behavior. Such strategic pricing is not illegal per se, but under the law, it cannot result in discrimination. The lower levels of price discrimination by algorithms suggests that removing face-to-face interactions can reduce discrimination. Further silver linings emerge in the FinTech era: (1) Discrimination is declining; algorithmic lending may have increased competition or encouraged more shopping with the ease of platform applications. (2) We find that 0.74-1.3 million minority applications were rejected between 2009 and 2015 due to discrimination; however, FinTechs do not discriminate in loan approval. |
| JEL: | G21 G28 J15 K22 K23 R31 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25943&r=all |
| By: | Cheikh A. Gueye; Asithandile Mbelu; Amadou N Sy |
| Abstract: | This paper studies the impact of declining oil prices on banks in sub-Saharan African oil-exporting countries. Results indicate that banks respond differently to an oil shock depending on their ownership: (i) domestic banks are the most adversely impacted and experience a deterioration in asset quality and liquidity; (ii) foreign-owned banks are the most resilient as they are able to improve asset quality and attract deposits but at the same time, they decelerate credit growth; in contrast, (iii) Pan-African Banks help stabilize overall credit but large banks in that segment experience reduced asset quality. These differentiated results suggest a tradeoff between maintaining credit growth and safeguarding financial stability in an oil slump which could be addressed by both micro- and macroprudential policies. |
| Date: | 2019–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/129&r=all |
| By: | Altavilla, Carlo; Burlon, Lorenzo; Giannetti, Mariassunta; Holton, Sarah |
| Abstract: | Exploiting confidential data from the euro area, we show that sound banks can pass negative rates on to their corporate depositors without experiencing a contraction in funding. These pass-through effects become stronger as policy rates move deeper into negative territory. Banks offering negative rates provide more credit than other banks suggesting that the transmission mechanism of monetary policy is not hampered. The negative interest rate policy (NIRP) provides further stimulus to the economy through firms’ asset rebalancing. Firms with high current assets linked to banks offering negative rates appear to increase their investment in tangible and intangible assets and to decrease their cash holdings to avoid the costs associated with negative rates. Overall, our results challenge the commonly held view that conventional monetary policy becomes ineffective when policy rates reach the zero lower bound. JEL Classification: E52, E43, G21, D22, D25 |
| Keywords: | corporate channel, lending channel, monetary policy, negative rates |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192289&r=all |
| By: | Pelletier, Adeline |
| Abstract: | Do foreign banks perform better than domestic banks in host developing economies? Relying on financial statements and survey data I compare the performance of three different categories of foreign banks to the group of domestic banks in sub-Saharan Africa: global banks from developed countries, regional African banks and banks from non-African emerging economies. While emerging-market banks and global banks consistently outperform domestic banks, the difference is not significant for regional African banks. The higher performance of global banks and emerging-market banks is related to higher operational efficiency and lower cost of funding, while there is no strong evidence of segmentation by business segment in the loans market. Regional African banks, which started their foreign expansion more recently, are less able to generate interest income compared to domestic banks. These findings highlight the importance of taking into account foreign banks’ heterogeneity when assessing the impact of financial FDI on the host economy. |
| Keywords: | foreign direct investment; international banking; performance |
| JEL: | F21 F23 G21 |
| Date: | 2018–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:86368&r=all |
| By: | Grover, Naina; Sinha, Pankaj |
| Abstract: | This study explores the micro and macro factors affecting liquidity created by Scheduled Commercial banks (excluding Regional Rural Bank) in India using the Generalized Method of Moments. Two measures of liquidity creation, the broad and narrow measures, were formed using RBI data available on Indian banks for the period 2005 to 2018. The study found that the variation in the broad measure was explained by equity ratio, market share, GDP, gross savings and lending rate whereas narrow measure was explained by equity ratio, market share, size and lending rate. Profitability and operating profit ratios did not affect liquidity creation. The crisis negatively affected both the measures of liquidity creation. The impact was more severe for the broad measure as compared to the narrow measure. We found the negative influence of capital on liquidity created by banks, which confirms that the implementation of Basel III norms in Indian banks will have negative implications for liquidity creation. Banks are perceived positively in the market when they create more liquidity. |
| Keywords: | Liquidity creation, micro and macro factors, broad and narrow measures, Indian Banks, influence of capital on liquidity |
| JEL: | G0 G01 G1 G18 G2 G21 G23 G3 G33 M4 |
| Date: | 2019–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:94280&r=all |
| By: | Anderson, Gareth; Riley, Rebecca; Young, Garry |
| Abstract: | Exploiting differences in pre-crisis business banking relationships, we present evidence to suggest that restricted credit availability following the 2008 financial crisis increased the rate of business failure in the United Kingdom. But rather than "cleansing the economy by accelerating the exit of the least productive businesses, we find that tighter credit conditions resulted in some businesses failing despite being more productive than their surviving competitors. We also find evidence that distressed banks protected highly leveraged, low productivity businesses from failure. |
| JEL: | D24 G21 G30 L10 |
| Date: | 2019–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:100947&r=all |
| By: | Alessi, Lucia (European Commission – JRC); Balduzzi, Pierluigi (Boston College); Savona, Roberto (Dipartimento di Economia e Management Università degli Studi di Brescia) |
| Abstract: | We construct a unique and comprehensive data set of 19 real-time daily macroeconomic indicators for 11 Eurozone countries, for the 5/11/2009{4/25/2013 period. We use this new data set to characterize the time-varying dependence of the cross-section of sovereign credit default swap (CDS) spreads on country-specific macro indicators. We employ daily Fama-MacBeth type cross-sectional regressions to produce time-series of macro-sensitivities, which are then used to identify risk regimes and forecast future equity market volatility. We document pronounced time-variation in the macro-sensitivities, consistent with the notion that market participants focused on very different macro indicators at the different times of the crisis. Second, we identify three distinct crisis risk regimes, based on the general level of CDS spreads, the macro-sensitivities, and the GIPSI connotation. Third, we document the predictive power of the macro-sensitivities for future option-implied equity market volatility, consistent with the notion that expected future risk aversion is an important driver of how CDS spreads impound macro information. |
| Keywords: | Sovereign crises; Real-time data |
| JEL: | G12 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:201903&r=all |
| By: | Georgarakos, Dimitris (Goethe University Frankfurt); Tatsiramos, Konstantinos (University of Luxembourg, LISER) |
| Abstract: | We examine the effects of monetary policy on household self-assessed financial stress and durable consumption using panel data from eighteen annual waves of the British Household Panel Survey. For identification, we exploit random variation in household exposure to interest rates generated by the random timing of household interview dates with respect to policy rate changes. After accounting for household and month-year-of-interview fixed effects, we uncover significant heterogeneities in the way monetary policy affects household groups that differ in housing and saving status. In particular, an increase in the interest rate induces financial stress among mortgagors and renters, while it lessens financial stress of savers. We find symmetric effects on durable consumption, mainly driven by mortgagors with high debt burden or limited access to liquidity and younger renters who are prospective home buyers. |
| Keywords: | monetary policy, mortgage debt, debt burden, financial stress, consumption |
| JEL: | G21 E21 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12359&r=all |
| By: | Goodhart, C. A. E.; Kabiri, Ali |
| Abstract: | There is a debate about the effect of the extremely low, or even negative, interest rate regime on bank profitability. On the one hand it raises demand and thereby adds to bank profits, while on the other hand it lowers net interest margins, especially at the Zero Lower Bound. In this paper we review whether the prior paper by Altavilla, Boucinha and Peydro (2018) on this question for the Eurozone can be generalized to other monetary blocs, i.e. USA and UK. While our findings have some similarity with their earlier work, we are more concerned about the possible negative effects of this regime, not only on bank profitability but also on bank credit extension more widely. |
| Keywords: | Bank profitability; Low interest rates; Net interest margin; credit extension |
| JEL: | E52 G18 G21 G28 |
| Date: | 2019–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:100968&r=all |
| By: | Antoni, Manfred; Koetter, Michael; Müller, Steffen; Sondershaus, Talina |
| Abstract: | Asset purchase programmes (APPs) may insulate banks from having to terminate relationships with unproductive customers. Using administrative plant and bank data, we test whether APPs impinge on industry dynamics in terms of plant entry and exit. Plants in Germany connected to banks with access to an APP are approximately 20% less likely to exit. In particular, unproductive plants connected to weak banks with APP access are less likely to close. Aggregate entry and exit rates in regional markets with high APP exposures are also lower. Thus, APPs seem to subdue Schumpeterian cleansing mechanisms, which may hamper factor reallocation and aggregate productivity growth. |
| Keywords: | plant exit,factor reallocation,asset purchase programmes |
| JEL: | E58 G21 G28 G33 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:122019&r=all |
| By: | David Gabauer (Institute of Applied Statistics, Johannes Kepler University, Altenbergerstraẞe 69, 4040 Linz, Austria and Department of Business and Management, Webster Vienna Private University, Praterstraẞe 23, 1020 Vienna, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa) |
| Abstract: | We investigate the spillover across real estate (REU), macroeconomic (MU) and financial uncertainties (FU) in the United States based on monthly data covering the period of July, 1970 to December, 2017. To estimate the propagation of uncertainties across the sectors, a time-varying parameter vector autoregression (TVP-VAR)-based connectedness procedure has been applied. In sum, we show that that since the 1970s, FU has been the main transmitter of shocks driving both, MU and REU, with MU dominating the REU. Our results support the need for better macroprudential policy decisions. |
| Keywords: | Dynamic Connectedness, Uncertainty Transmission, Real Estate Uncertainty, Macroeconomic Uncertainty, Financial Uncertainty, TVP-VAR |
| JEL: | C32 E32 F42 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201944&r=all |
| By: | Frey, Rainer; Weth, Mark |
| Abstract: | For the largest 55 German banks, we detect the presence of countercyclical yield seeking in the form of acquisition of high-yielding periphery bonds in the period from Q1 2008 to Q2 2011. This investment strategy is pursued by banks not subject to a bailout, banks characterised by high capitalisation, banks that rely on short-term wholesale funding, and trading banks. In the subsequent period up to 2014, these banks switched to a procyclical divestment strategy resulting in the sale of risky assets. Following the launch of the public sector purchase programme (PSPP) in 2015, a clear investment pattern can no longer be identified. Unlike existing evidence for banks domiciled in vulnerable countries, we find that the recourse to central bank finance is rather limited and does not affect the risk-taking behaviour of banks in the non-stressed country Germany. Yield-seeking strategies were predominantly pursued by healthy banks in Germany. This contrasts with the increases in domestic sovereign holdings in vulnerable countries which can be primarily regarded as the result of moral suasion or, for weakly capitalised banks, a kind of "indirect" moral suasion or "home-biased" gambling for resurrection. |
| Keywords: | sovereign-bank nexus,sovereign bond holdings,yield seeking,moral suasion,capital adequacy,expansionary monetary policy,home bias,Sovereign-bank nexus,sovereign bond holdings,yield seeking,moral suasion,capital adequacy,expansionary monetary policy,home bias |
| JEL: | G11 G21 F34 H81 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:192019&r=all |
| By: | Roberto Fontana; Elisa Luciano; Patrizia Semeraro |
| Abstract: | The issue of model risk in default modeling has been known since inception of the Academic literature in the field. However, a rigorous treatment requires a description of all the possible models, and a measure of the distance between a single model and the alternatives, consistent with the applications. This is the purpose of the current paper. We first analytically describe all possible joint models for default, in the class of finite sequences of exchangeable Bernoulli random variables. We then measure how the model risk of choosing or calibrating one of them affects the portfolio loss from default, using two popular and economically sensible metrics, Value-at-Risk (VaR) and Expected Shortfall (ES). |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1906.06164&r=all |
| By: | Kjell G. Nyborg (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute) |
| Abstract: | Repo rates frequently exceed unsecured rates in practice. As an explanation, this paper derives a constrained-arbitrage relation between the unsecured rate, the repo rate, and the illiquidity adjusted expected rate of return of the underlying collateral. The theory is based on unsecured borrowing constraints in the market for liquidity. Repos and security cash-market trades are alternative means to get liquidity. Collateral spreads (unsecured less repo rate) can turn negative if borrowing constraints tighten, unsecured rates spike down, or from a depressed and illiquid security market. The constrained-arbitrage theory sheds light on the evolution of collateral spreads over time. |
| Keywords: | collateral spread, constrained-arbitrage, liquidity, market linkages, repo rate, unsecured rate, general collateral |
| JEL: | G01 G12 G21 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1904&r=all |