Asset encumbrance, financial reform and the demand for collateral assets

CGFS Papers  |  No 49  | 
27 May 2013
PDF full text
 |  53 pages

The demand for high-quality assets that can be used as collateral will increase due to a number of key regulatory reforms. This comes on top of greater demand for collateral assets through increased reliance by banks on collateralised funding, particularly in Europe. While this can lead to temporary shortages in some countries, concerns about an absolute shortage of high-quality collateral assets appear unjustified, given that the supply of collateral assets has risen significantly since end-2007. In addition, endogenous private sector responses, such as collateral transformation activities, will help to address supply-demand imbalances if and when they emerge.  

The report identifies implications for markets and policy that result from these developments that warrant monitoring and further analysis. They include:

  • Endogenous market responses, while mitigating collateral scarcity, are likely to come at the cost of increased interconnectedness and greater financial system procyclicality.
  • Greater reliance by banks on collateralised funding can adversely affect the residual claims of unsecured creditors during bank resolution, increase risks to deposit insurance schemes and reduce the effectiveness of policies aimed at bail-in.