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Fire buys of central bank collateral assets

Author

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  • de Roure, Calebe
Abstract
In times of financial distress, central banks provide unlimited liquidity to avoid fire sales. In response, banks raise their demand for collateral assets, and the short-term scarcity of collateral securities leads to higher prices, the Fire Buy premium. To avoid collateral scarcity, central banks increase the set of eligible collateral assets. However, if the risk-shifting channel is open for these newly eligible securities, banks prefer to pledge them and pay another premium, the Risk-Shifting premium. With the full fixed-income trading book of 26 German banks, I identify each trade of each bank and investigate how unlimited liquidity provision affects collateral prices. Also, I match banks' trades with their balance sheet and show how funding liquidity impacts premia payment. I quantify the Fire Buy premium to be 15.6 bps; and the Risk-Shifting premium on BBB-rated assets to be 65.6 bps.

Suggested Citation

  • de Roure, Calebe, 2016. "Fire buys of central bank collateral assets," Discussion Papers 51/2016, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:512016
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    References listed on IDEAS

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    Cited by:

    1. Bindseil, Ulrich & Corsi, Marco & Sahel, Benjamin & Visser, Ad, 2017. "The Eurosystem collateral framework explained," Occasional Paper Series 189, European Central Bank.
    2. Pelizzon, Loriana & Riedel, Max & Simon, Zorka & Subrahmanyam, Marti G., 2020. "Collateral eligibility of corporate debt in the Eurosystem," SAFE Working Paper Series 275, Leibniz Institute for Financial Research SAFE.
    3. Cassola, Nuno & Koulischer, François, 2019. "The collateral channel of open market operations," Journal of Financial Stability, Elsevier, vol. 41(C), pages 73-90.
    4. Podlich, Natalia & Schnabel, Isabel & Tischer, Johannes, 2017. "Banks' trading after the Lehman crisis: The role of unconventional monetary policy," Discussion Papers 19/2017, Deutsche Bundesbank.
    5. Schmidt, Kirsten, 2019. "Does liquidity regulation impede the liquidity profile of collateral?," Working Paper Series 2256, European Central Bank.

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    More about this item

    Keywords

    Fire Buy; Risk-Shifting; Haircut Subsidy; ECB; Over-the-Counter Markets;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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