Central bank collateral, asset fire sales, regulation and liquidity

Arbeitspapier

This paper analyses the potential roles of bank asset fire sales and recourse to central bank credit to ensure banks' funding liquidity and solvency. Both asset liquidity and central bank haircuts are modelled as power functions within the unit interval. Funding stability is captured as strategic bank run game in pure strategies between depositors. Asset liquidity, the central bank collateral framework and regulation determine jointly the ability of the banking system to deliver maturity transformation and financial stability. The model also explains why banks tend to use the least liquid eligible assets as central bank collateral and why a sudden non-anticipated reduction of asset liquidity, or a tightening of the collateral framework, can destabilize short term liabilities of banks. Finally, the model allows discussing how the collateral framework can be understood, beyond its essential aim to protect the central bank, as financial stability and non-conventional monetary policy instrument.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1610

Classification and Topics

• Classification: Wirtschaft ; Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: asset liquidity ; bank run ; central bank collateral framework ; liquidity regulation ; Unconventional monetary policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bindseil, Ulrich
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/154043