The pre-crisis financial architecture was a system of mobile collateral. Safe debt, whether government bonds or privately produced bonds, ie asset-backed securities, could be traded, posted as collateral, and rehypothecated, moving to its highest value use. Since the financial crisis, regulatory changes to the financial architecture have aimed to make collateral immobile, most notably with the BIS "liquidity coverage ratio" for banks. In the face of the Lucas critique, how should these policies be evaluated? We evaluate this immobile capital system with reference to a previous regime, which had this feature: the US National Banks Era.
The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS or its member central banks.