Central bank haircut policy

Abstract

We present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral. Setting a haircut therefore involves balancing the trade-off between relaxing the liquidity constraints of agents on one hand, and increasing potential inflation risk and distorting the portfolio choices of agents on the other. We argue that the optimal haircut is higher when the central bank is unable to lend exclusively to agents who actually need liquidity. Finally, for an unexpected drop in the haircut, the central bank can be more aggressive than when setting a permanent level of the haircut. RésuméLes auteurs étudient la politique de décote optimale à l'aide d'un modèle formalisant l'octroi par la banque centrale de prêts contre garantie. Ils montrent qu'une facilité de prêt offre une assurance à la fois contre le risque de liquidité et contre le risque de baisse de la valeur de la garantie. L'établissement du niveau de la décote suppose donc un arbitrage entre, d'une part, le desserrement des contraintes de liquidité des agents et, d'autre part, le risque de faire augmenter l'inflation et de fausser les choix de portefeuille des agents. Les auteurs soutiennent que la décote optimale est plus élevée lorsque la banque centrale n'est pas en mesure de limiter exclusivement ses prêts aux agents qui ont réellement besoin de liquidités. Enfin, quand elle abaisse la décote de façon inattendue, la banque centrale a plus de latitude que lorsqu'elle en fixe durablement le niveau.

Monetary Policy Implementation Frameworks: A Comparative Analysis

“…3 This market allows agents to adjust their reserves holdings after they observe a signal about whether or not they are likely to need reserves. As in BM, we consider monetary policy implementation systems with a daily reserve maintenance period, in which the level of required reserves is normalized to zero.…”

“…However, an interest on deposits is itself in ‡ationary, so that agents who actually need reserves 3 Note that the money supply, in our model, consists only of CB reserves.…”

The Impact of Return on Collateral in a Channel System

“…There may be other costs that private banks should consider as well. For example, as Chapman, Chiu, and Molico () pointed out, when a central bank extends a collateralized loan to a private bank, the value of the collateral is usually subject to a discount or “haircut” to ensure that in the event of a default the collateral can be liquidated to repay a sufficient amount of the loan. This haircut policy is another form of the cost of acquiring collateral which is not directly reflected in the price.…”

Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic

“…General equilibrium models of channel systems are Berentsen and Monnet (2008), Cúrdia and Woodford (2011), Monnet (2011), andChapman et al (2011), where the latter two build on Berentsen and Monnet (2008). Our model also builds on Berentsen and Monnet (2008), who analyze the optimal interest-rate corridor in a channel system.…”

“…We also have a more complex structure of liquidity shocks, which allows us to study how policy affects the distribution of overnight liquidity in a general equilibrium model. In Chapman et al (2011) the value of the collateral is uncertain. The focus in their paper is on the optimal haircut policy of a central bank.…”