Re‐Use of Collateral in the Repo Market

Abstract

This paper introduces a methodology to estimate the re-use of collateral based on actual transaction data. With a comprehensive data set from the Swiss franc repo market we are able to provide the first systematic study on the re-use of collateral. We find that re-using collateral was most popular prior to the financial crisis when roughly 10% of the outstanding interbank volume was secured with re-used collateral. Furthermore, we show that the re-use of collateral increases with the scarcity of collateral. By giving an estimate of the collateral re-use and explaining its drivers, the paper contributes to the on-going debate on collateral availability.JEL codes: D47, E58, G01, G18, G21, G32

The art of leverage: a study of bank power, money-making and debt finance

“…Besides harmonising the complementary goals of risk AMs and safe PMs (Pozsar 2014: 54), the rehypothecation of collateral via repo transactions provides an elastic, in-built mechanism for procyclical bank leverage (see also Fuhrer et al 2016Fuhrer et al : 1171 and allows a broker-dealer bank "to operate with a smaller stock of its own securities and thus reduce balance sheet costs (e.g. capital costs)" (Financial Stability Board 2017: 4).…”

Exit strategies for monetary policy

“…The reason is that absorbing reserves using term deposits or by selling assets reverses QE in our model. 18 Under no …scal support, i m only increases above i d for M < 0:64. Moreover, the money market activity is lower than under full …scal support.…”

“…The proof involves deriving equations (16) to (18). Equation (18) is derived in the proof of Lemma 1. To derive equation (16),…”

Liquidity in the repo market

“…(Kraenzlin, 2008). In interbank repo transactions against the SNB GC basket no haircuts are applied (as defined in the collateral framework of the SNB), the right for collateral substitution is usually not granted, and re-use of collateral is possible (Fuhrer, Guggenheim and Schumacher, 2016).…”