The use of collateral in bilateral repurchase and securities lending agreements

Baklanova, Viktoria; Caglio, Cecilia; Cipriani, Marco; Copeland, Adam

doi:10.1016/j.red.2019.05.002

Cited by 43 publications

(26 citation statements)

References 41 publications

(57 reference statements)

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“…6 Moreover, data on loan terms for securities used as collateral are only now beginning to be collected in the United States on a limited basis. See, for instance, Baklanova et al (2017). experimental data.…”

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confidence: 99%

Collateral Constraints and the Law of One Price: An Experiment

Cipriani¹,

Fostel²,

Houser

2018

The Journal of Finance

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We test the asset pricing implications of collateralized borrowing (that is, of using assets as collateral to borrow money) in the laboratory. To this purpose, we develop a general equilibrium model with collateral constraints amenable to laboratory implementation and gather experimental data. In the laboratory, assets that can be leveraged fetch higher prices than assets that cannot, even though assets' payoffs are identical in all states of the world. Collateral value, therefore, creates deviations from the Law of One Price. The spread between collateralizeable and noncollateralizeable assets is significant and quantitatively close to theoretical predictions.

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confidence: 99%

Collateral Constraints and the Law of One Price: An Experiment

Cipriani¹,

Fostel²,

Houser

2018

The Journal of Finance

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“…Data on the loan terms for U.S. securities used as collateral in domestic funding markets are only beginning to be collected and used in limited samples (see Copeland, Martin and Walker (2014) and Baklanova et al (2017) for evidence). In the absence of direct evidence to justify our conjecture, one could instead consider proxies for cross-country differences in demand for and supply of collateral.…”

Section: Discussionmentioning

confidence: 99%

Global Collateral and Capital Flows

2019

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Cross-border financial flows arise when (otherwise identical) countries differ in their abilities to use assets as collateral to back financial contracts. Financially integrated countries have access to the same set of financial instruments, and yet there is no price convergence of assets with identical payoffs, due to a gap in collateral values. Home (financially advanced) runs a current account deficit. Financial flows amplify asset price volatility in both countries, and gross flows driven by collateral differences collapse following bad news about fundamentals. Our results can explain financial flows among rich, similarly-developed countries, and why these flows increase volatility.Recent decades have exhibited a proliferation of financial innovation and dramatic increases in gross international financial flows among financially developed countries. Economists have tended to focus on flows between developed and emerging economies, but gross flows among developed economies are substantial. 1 If these flows were primarily driven by diversification motives, then one would expect capital flows to dampen shocks and decrease volatility. However, there is ample evidence that financial integration increases volatility and amplifies shocks, suggesting that the nature of these flows are at least in part driven by other motives. We show that cross-border differences in the ability to collateralize financial promises are enough to generate international capital flows because international financial trade is a way of sharing scarce collateral. Critically, these flows amplify global volatility in asset prices and collapse during crises. Motivating evidenceThe following empirical observations motivate our analysis.Observation 1: There are substantial gross financial flows between rich countries with similar levels of financial development. These gross financial flows (countries simultaneously buying and selling foreign and domestic assets) are an order of magnitude larger than net trade in assets. In some cases these offsetting flows are heavily concentrated in financial assets and in particular in securitized mortgage securities. First, among developed countries there are substantial foreign holdings of government bonds, and for many countries non-residents make up the largest investor base (Andritzky, 2012). Second, there are substantial gross flows between the U.S. and Europe (see Shin, 2012;Bertaut et al., 2012). These flows were most striking pre-crisis, and while they have partially reversed post-crisis (as did all gross flows), the patterns remain. 2 Finally, as documented by Hale and Obstfeld (2016), there are substantial gross flows within Europe, and these flows are concentrated in just a few countries: Germany, Belgium, and France stand out among the 1 See for example Bruno and Shin (2014), who discuss implications for intermediation costs. 2 See BIS locational banking statistics.

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“…Auh and Landoni (forthcoming) use micro data from an asset manager to show that clients may face a choice of different haircut-financing rate pairs for particular collateral at any point in time. Baklanova, Caglio, Cipriani, and Copeland (2017) use data provided from several banks to document the patterns of terms across asset classes, but many of their results focus on the Treasury market. A 2010 study published by the Committee on the Global Financial System (CGFS, 2010) reported the results of interviews with several funding-market participants.…”

Section: Review Of Securities Financingmentioning

confidence: 99%

“…In particular, they include securities borrowing and transactions with other dealers. Evidence in Gorton and Metrick (2012b) and Baklanova et al (2017) suggests that these two categories in fact constitute the majority of dealer activity. 13 Even so, the data do not suggest that financing volumes are very sensitive to changes in terms (or vice versa).…”

Section: Stylized Facts About Securities Financing Termsmentioning

confidence: 99%

“…As noted above, the primary motivation for our study is the lack of available evidence on securities financing arrangements between dealers and their clients. Indeed, only two other empirical papers, Auh and Landoni (forthcoming) and Baklanova, Caglio, Cipriani, and Copeland (2017), have studied this market in any detail. 3 While the confidential micro data used in those studies allowed for a number of interesting tests that the SCOOS data do not, their coverage was relatively narrow.…”

Section: Introductionmentioning

confidence: 99%

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Securities Financing and Asset Markets: New Evidence

Breach¹,

King²

2018

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This paper presents new evidence on bilateral securities financing based on the Federal Reserve's Senior Credit Officer Opinion Survey, which was launched in the wake of the financial crisis to provide a window into this otherwise opaque market. The survey asks large broker-dealers about terms at which they fund client positions, and the demand for such funding, across several different collateral types. Within asset classes, reported changes in spreads, haircuts, and other financing terms move closely together, and we show that they also covary with the state of the underlying cash securities markets. Funding conditions are particularly highly correlated with measures of cash-market liquidity, and, by exploiting dealers' self-reported reasons for changing terms, we show that most of this correlation results from dealers responding to liquidity, rather than the other way around. Controlling for securities-market conditions, haircuts and spreads are unresponsive to shifts in funding demand; however, they do tend to tighten when measures of dealer condition deteriorate.

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The use of collateral in bilateral repurchase and securities lending agreements

Cited by 43 publications

References 41 publications

Collateral Constraints and the Law of One Price: An Experiment

Collateral Constraints and the Law of One Price: An Experiment

Global Collateral and Capital Flows

Securities Financing and Asset Markets: New Evidence

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