On Collateral: Implications for Financial Stability and Monetary Policy

Convenient But Risky Government Bonds

“…Together with the regression results in Table 4, we interpret this negative relationship as evidence suggesting a substantial collateral valuation effect. This is in line with the decline of Italian government bond yields below the deposit facility rate in 2008 Corradin et al (2017), while Italy's debt-to-GDP ratio increased by more than 10 percentage points between 2008Q1 and 2009Q1. Importantly, the negative relationship between debt supply and convenience yield holds after controlling for investor risk aversion.…”

“…The positive relationship between liquidity premia and financial stress is discussed inVayanos (2004). See alsoCorradin et al (2017) and the references therein.…”

The preferential treatment of green bonds

“…In the quantitative analysis, we assume that banks incur liquidity management costs Ω(b i t+1 ), which gives rise to collateral premia. In this section, we demonstrate that the resulting first order conditions for corporate bonds are observationally equivalent to the most common microfoundation used in this context, which are stochastic bank deposit withdrawals, see Corradin et al (2017), De Fiore et al (2019, Piazzesi and Schneider (2021), or Bianchi and Bigio (2022). The standard modeling device in this literature is a two sub-period structure, where banks participate in asset markets sequentially: in the first sub-period, banks trade with households on the deposit market and with intermediate good firms on the corporate bond market.…”

The Preferential Treatment of Green Bonds

“…The assumption Ω b,t < 0 captures in reduced form the benefits of collateral to settle idiosyncratic liquidity shocks on interbank markets or with the central bank. Since neither the sources of liquidity demand, which might be heterogeneous deposit and credit line withdrawals or market making activity, nor the reason why this market is collateralized are at the heart of our paper, we introduce this feature in reduced form and refer to Corradin et al (2017), De Fiore et al (2019), Bianchi and Bigio (2020), and the references therein for more details and different micro-foundations.…”