Discussion paper

DP16439 Safe asset shortage and collateral reuse

The reuse of collateral can support the efficient allocation of safe assets in the financial system. Exploiting a novel dataset, we show that banks substantially increase their reuse of sovereign bonds in response to scarcity induced by Eurosystem asset purchases. While repo rates react little to purchase-induced scarcity when reuse is low, they become increasingly sensitive at high levels of reuse. An elevated reuse rate is also associated with more failures to deliver and a higher volatility of repo rates in the cross-section of bonds. Our results highlight the trade-off between shock absorption and shock amplification effects of collateral reuse.

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Citation

Jank, S, E Moench and M Schneider (eds) (2022), “DP16439 Safe asset shortage and collateral reuse”, CEPR Press Discussion Paper No. 16439. https://cepr.org/publications/dp16439