By Kjell G. Nyborg
Significant financial institution collateral frameworks are a frequently forgotten characteristic of financial coverage that play a key function within the financial and monetary approach. Readers will detect how crucial banks behavior and enforce financial coverage past basically surroundings rates of interest, and enhance their figuring out as to how collateral guidelines may well have an effect on monetary markets, monetary balance, and the true economic system. This e-book reviews the collateral framework within the euro zone intimately, and levers this research to supply an account of the euro hindrance from the point of view of collateral coverage. Readers achieve entry to a wealth of institutional and fiscal facts and data with a degree of density and accessibility unavailable in different places. This publication, the 1st of its style, is a priceless learn for educational financial and fiscal economists, these operating in banking and policy-making monetary associations, and an individual who needs to benefit extra concerning the function of significant banks in society.
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Additional info for Collateral Frameworks: The Open Secret of Central Banks
There is no doubt that central banks have to play a role in an economic crisis at the market level as well as at the level of individual systemically important banks. In order to act appropriately, they need room to maneuver, which implies a sound central bank balance sheet with sufficient equity. These sentiments are echoed by Klaas Knot (2013), Governor of the Dutch Central Bank: The unprecedented expansion of central banks’ balance sheets since the start of the crisis is certainly revealing.
5 This list is updated daily and posted on the ECB’s webpage. The set of eligible collateral ranges from sovereign bonds to unsecured bank bonds and ABSs, with a large span of ratings within all asset classes. At the end of 2013, these had a value of around EUR 14 trillion. In addition, banks can pledge non-marketable assets such as credit claims. Guarantees by governments, corporations, and other entities can be, and are, used to provide eligibility to otherwise non-eligible collateral. “Marketable” collateral without such guarantees or external ratings can be made privately eligible through the use of approved in-house ratings.
Only the highest rating counts in the 10 The ECB refers to these as external credit assessment institutions, or ECAIs. I will use the simpler terminology of (accepted) rating agencies. 11 I document that DBRS has been pivotal in providing an A– rating for Italy, Ireland, and Spain, and a BBB– rating for Portugal. I estimate that the lower haircuts on government bonds from these countries as a result of the pivotal ratings by DBRS are worth around EUR 200 to 300 billion in increased collateral value.