Collateral Policy Research Articles

Patent collateral and the trajectory of innovation

Taking the Chinese policy project of patent collateral policy as the quasi-natural experiment setting, we investigate the impact of patent collateral policy on the corporate innovation trajectory. We find that patent collateral increases applications of exploitative patent and its proportion in total patent applications, but no significant impact on exploratory innovation is observed. This finding is still robust in a series of robustness tests. The mechanism tests show that the impact of patent collateral promotes firms' exploitative innovation mainly by increasing the accessibility of firms' bank loans. The economic effects test shows that the patent collateral policy can reduce the deviation of analyst forecast and ease corporate financing constraints, which plays an important role in stabilizing capital market expectations. Heterogeneity analysis shows that patent collateral policy mainly promotes exploitative innovation of companies whose senior executives have no financial background, non-high-tech companies and non-SOEs. This paper enriches the research on the innovation incentive effects of patent collateral policy by providing an empirical investigation of the impact of patent collateral policy on corporate innovation trajectory. It helps to provide insights for emerging market countries as to improve patent collateral policy to promote the quality of corporate innovation.

Collateral policy of the central bank and corporate financing costs: Evidence from China

This paper proposes a model of collateral policy to study the impact of the expansion of collateral scope by central banks on corporate financing costs. Based on the theoretical model and a quasi-natural experiment in China, this paper empirically tests the effect of the expansion of the collateral scope for Medium-Term Lending Facility (MLF) by the People's Bank of China on corporate financing costs. We find that this loosening of collateral policy in China can significantly reduce the credit spreads for enterprises by 45 bps and the loan financing costs for micro and small enterprises by 71 bps, respectively. After a series of robust tests, the impact of the loose collateral policy on corporate financing costs remains significant statistically and economically.

The preferential treatment of green bonds

We study the preferential treatment of green bonds in the central bank collateral framework as a climate policy instrument within a DSGE model with climate and financial frictions. In the model, green and carbon-emitting conventional firms issue defaultable corporate bonds to banks that use them as collateral, subject to haircuts determined by the central bank. A haircut reduction induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green investment. Optimal collateral policy is characterized by a haircut gap of 20 percentage points, which increases the green investment share and reduces emissions. However, welfare gains fall well short of what can be achieved with optimal carbon taxes. Moreover, due to elevated risk-taking of green firms, preferential treatment is a qualitatively imperfect substitute of Pigouvian taxation on emissions: if and only if the optimal emission tax can not be implemented, optimal collateral policy features a preferential treatment of green bonds.

The Preferential Treatment of Green Bonds

We study the preferential treatment of green bonds in the Central Bank collateral framework as an environmental policy instrument within a DSGE model with environmental and financial frictions. Green and conventional entrepreneurs issue bonds to banks that use them as collateral. The associated collateral premium induce entrepreneurs to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on entrepreneur risk-taking, and subsidizing green investment. Due to these adverse side effects, optimal collateral policy is characterized by modest preferential treatment, thereby increasing the green bond share and, to a smaller extent, the green investment share, which in turn reduces pollution. The limited response of green investment is directly related to higher risk-taking of green entrepreneurs. Furthermore, we show that preferential treatment is an imperfect substitute of Pigouvian taxation on pollution: only if the optimal tax can not be implemented, optimal collateral policy features preferential treatment of green bonds.

Determinants of environmental financing constraints: a case study from Vietnam.

The Environment Fund is a state financial institution and a non-profit organization, operating mainly in concessional loans with low-interest rates for green investment projects, working towards sustainable development. There have been no studies to assess the firms' ability to access environmental finance from these Environment Funds. This study uses a combination of both qualitative and quantitative methods. We initially identified the determinants of access to green finance and financing constraints that firms face by in-depth interviews with 32 individuals from the six largest Environment Funds in Vietnam and their clients. Secondly, by surveying 213 firms that had loan request from 26 Environment Funds, we investigated the factors affecting access to environmental finance by the Ordered Probit model. The findings show that firm characteristics and environmental project characteristics have a relationship vis-a-vis access to green finance. We did not find evidence that supports state-owned firms experiencing less financing constraints than other types of firms. Collateral requirements, excessive paperwork requirements, and insufficient capital from Environment Funds are the three main obstacles to green financing. Environment Funds should design loan packages that are more diversified and suitable for different types of environmental projects. At the same time, a more relaxed collateral policy should be applied in Environment Funds to enhance firms' ability to obtain green finance. We suggest that Environment Funds cooperate with commercial banks to provide financial support for the environment to compensate for capital size constraints and asymmetric information.

Efficiency and productivity of the Brazilian banks: A new approach based on two-stage network DEA

This article creates a conceptual model, called a network system, to represent the Brazilian banking production system, based on its internal operational processes. The first, called the intermediation process, measures a bank's efficiency in extending loans from its available resources. The second, called the revenue process, measures a bank's efficiency in earning profit, mainly from loans granted. We adopt a two-stage DEA model. In the first stage, a relational network DEA model measures both the network system efficiency scores and internal processes. This technique, associated with the Malmquist Index, assesses performance changes over time. In the second stage, these efficiency scores are considered dependent variables, such that Tobit models can determine how the Brazilian credit market's characteristics can explain the network system and internal processes' efficiency. Results show not only a growing trend toward greater efficiency in the revenue process, but also an increase in productivity accompanied by a decline in the intermediation process technology. Given the high banking spreads in Brazil, these results indicate deterioration in the quality of the credit portfolio and the prospect of future insolvency. We discuss implications of this scenario for domestic banks and collateral policy.

Flight Abroad in the Euro Area: Evidence From a ECB Collateral Framework Change

This paper studies the effect of central bank collateral policy on bank credit supply and the real economy. In 2007, the European Central Bank replaced national collateral lists with a single list valid across the euro area. Banks holding newly eligible assets experienced a reduction in their cost of funding. Consequently, they lent more compared to banks without such assets, and they extended more loans to riskier and less productive borrowers located in other euro area countries. These borrowers in turn experienced a growth in employment and investment. The results highlight the role of financial integration in fueling cross-border credit booms.

Collateral Misrepresentation, External Auditing, and Optimal Supervisory Policy

Collateral Misrepresentation, External Auditing, and Optimal Supervisory Policy

Climate-related Risks and Central Banks’ Collateral Policy: A Methodological Experiment

Central banks increasingly acknowledge that climate change is a source of financial risks, which is likely to also impact their conduct of monetary policy. Against this backdrop, the aim of this paper is to explore one potential approach to factoring climate-related transition risks into a central bank’s collateral framework. Given the radical uncertainty associated with measuring such risks, this approach relies on so-called climate “alignment” methodologies, which enable to assess the consistency of eligible and pledged marketable assets with specific climate targets. Moreover, this paper proposes a “climate-hedging portfolio approach”: instead of seeking to “align” the collateral on an asset-by-asset basis, central banks could aim for “alignment”, in aggregate, of the collateral pools pledged by their counterparties with a given climate target. The rationale for this choice is that assessing climate-related risk at the pool level avoids the Eurosystem having to decide on which assets/issuers in the pools should be excluded or capped, and is therefore more compatible with a market neutrality approach. The numerical experiment using Eurosystem marketable criteria data suggests that, in aggregate, neither the Eurosystem eligible collateral universe nor the collateral pledged is “aligned” with the climate targets of the European Union. From this perspective, the Eurosystem marketable collateral can be considered to be exposed to climate-related transition risks. We discuss the potential practical implications of aiming to “align” collateral pools, and suggest avenues for further work

The Price of Money: How Collateral Policy Affects the Yield Curve

Central-bank collateral policy governs the convertibility of assets into central-bank money provided directly by the central bank. Focusing on government bonds, we develop clean identification of variation in such convertibility by exploiting differential treatment of same-country government bonds in the euro area. Combining difference-in-differences analysis with yield-curve modeling on four separate events, we show that reduced convertibility lifts yields, but with the effect tapering off at longer maturities. Our findings imply that central-bank money is priced in the market and that a central bank can move and shape the yield curve through collateral policy.

The Preferential Treatment of Green Bonds

We study the preferential treatment of green bonds in the Central Bank collateral framework as an environmental policy instrument within a DSGE model with environmental and financial frictions. Green and conventional entrepreneurs issue bonds to banks that use them as collateral. The associated collateral premium induce entrepreneurs to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on entrepreneur risk-taking, and subsidizing green investment. Due to these adverse side effects, optimal collateral policy is characterized by modest preferential treatment, thereby increasing the green bond share and, to a smaller extent, the green investment share, which in turn reduces pollution. The limited response of green investment is directly related to higher risk-taking of green entrepreneurs. Furthermore, we show that preferential treatment is an imperfect substitute of Pigouvian taxation on pollution: only if the optimal tax can not be implemented, optimal collateral policy features preferential treatment of green bonds.

THE IMPACT OF RETURN ON COLLATERAL IN A CHANNEL SYSTEM

We empirically investigate the relationship between the return on collateral and monetary policy implementation in the channel system. Recent developments in monetary theory suggest that the return on government assets which measures the opportunity cost of holding collateral should have negative impacts on the interest‐rate spread and the interbank market rate. The central bank should set a higher spread when the return on collateral is below a cutoff but implements a lower spread when the return on collateral is higher than the cutoff. The interbank market rate tends to lie above the policy target rate when the return on collateral is low and vice versa. We use data from Eurozone area and six industrialized countries to test these theoretical implications. We propose two econometric models: one is more structural and closely related to the monetary model to test the negative relationships, and the other is based on the threshold autoregression model to detect the potential cutoffs. Our findings provide conditional support for the negative impact of return on collateral. (JEL E40, E52, E58)

Capital flight to Germany: Two alternative measures

We use two measures to study two capital flight channels for Germany. One measure is based on the concept of trade misinvoicing and one on net claims and liabilities in the Eurosystem of central banks. For both measures, we propose refinements to enhance the assessment of capital flight. We find that capital flight towards Germany via these two channels has been quite sizable in the recent decade and can tally to about 2% of GDP annually. Regarding their determinants, we show that the two capital flight measures are driven by both common and measure-specific factors. Traditional determinants such as covered interest differentials only play a limited role, while crisis-specific factors such as economic policy uncertainty, the ECB collateral policy, as well as currency misalignment are driving factors of the investors’ apparent flight-to-safety behavior.

Mortgage debt and social externalities

In an attempt to keep up with the social standards defined by their peer group, households can use long-term collateralized lending to finance purchases of goods that signal social value – most notably, real estate. Because in the social status game somebody's advance is always somebody else's regress, this behavior can lead to inefficient allocations, making the economy as a whole more financially vulnerable. In this paper, we show that prudential policy taking the form of collateral constraints can mitigate the negative consequences of social arms races, and potentially improve household welfare. We introduce preferences for social status in a calibrated life cycle framework with heterogeneous agents, and find that positional concerns lead to a higher build-up of debt and a net loss of resources. In equilibrium, the optimal collateral policy results from the trade-off between a usual purely distortionary effect, and the negative social externalities of over-borrowing.

Determinants of the Eurosystem's Central Banks Provisions

AbstractCentral bank provisions may be used as a measure of the perceived risk of the balance sheet composition by a central bank. We identify three possible sources that may change the size of the provisions. These are: The length of the balance sheet, the central bank revenues, and measures of fiscal stress. Using data of the 11 founding members of the Eurosystem for the years 1999–2015, we are able to test each of the three determinants. We find that provisions are increased with the size of the balance sheet especially in the recent financial crisis. Moreover, provisions are increased at the cost of lower central bank revenues. While this holds for the pre‐crisis period this relationship seems to be less pronounced in the crisis period probably because of the more active collateral policy. Finally, central banks do not tend to lower provisions because of fiscal tensions. This is even more true in the crisis period.

Real Effects of Central Bank Collateral Policy

Real Effects of Central Bank Collateral Policy

Non-Standard Measures of the Monetary Policy – Mechanism for Overcoming Problems in the Implementation of the Neoliberal Concept of Monetary Policy During a Financial Crisis

AbstractAfter multiple decreases in the reference interest rate and its reaching zero bounds in certain countries during the recent global financial crisis, central banks in developed countries have started applying non-standard measures of monetary policy. This does not refer to introducing new monetary policy instruments, but rather to a certain relativisation within the framework of standard instruments, in terms of maturity of liquidity provision, collateral policy and counterparties. Therefore, the aim of this paper is to examine the role of non-standard measures of monetary policy as a mechanism for overcoming problems in the implementation of the neoliberal concept of monetary policy in the conditions of the financial crisis. The answer to this question is rather sensitive, considering the fact that the neoliberal concept was supported by the most developed countries, that is, in fact, their central banks were using non-standard instruments of monetary policy for the greatest part.

Central Counterparty Capitalization and Misaligned Incentives

Financial stability depends on the effective regulation of central counterparties (CCPs), which must take account of the incentives that drive CCP behavior. This paper studies the incentives of a for-profit CCP with limited liability. It faces a trade-off between fee income and counterparty credit risk. A better-capitalized CCP sets a higher collateral requirement to reduce potential default losses, even though it forgoes fee income by deterring potential traders. I show empirically that a 1% increase in CCP capital is associated with a 0.6% increase in required collateral. Limited liability, however, creates a wedge between its capital and collateral policy and the socially optimal solution to this trade-off. The optimal capital requirements should account for clearing fees.

A Theory of Collateral for the Lender of Last Resort

We build a model to analyze the optimal lending and collateral policy for the lender of last resort. Key to our theory is the idea that the central bank’s policy can impose an externality on private markets. On the one hand, lending against high-quality collateral protects the central bank from potential losses but it can adversely affect the pool of collateral in funding markets and impair their efficient functioning since the much needed high-quality collateral gets tied up with the central bank. On the other hand, lending against low-quality collateral exposes the central bank to counterparty risk but improves the pool of collateral in funding markets and can unlock frozen markets. We characterize the optimal policy for the central bank taking into account these trade-offs. We show that, contrary to what is generally accepted, it may be optimal for the lender of last resort to lend against low-quality collateral.

Violating the Law of One Price: The Role of Non-Conventional Monetary Policy

We document that a large yield spread, a basis, developed between USD- and EUR-denominated comparable bonds issued by the same euro area country over the 2008-2013 period. We find evidence that the basis varies over time, depending on liquidity withdrawn by strongly-constrained banks from the ECB and haircuts applied in the repo market, on the one hand, and the collateral policy and the liquidity supply conditions determined by the ECB, on the other. Overall, ECB collateral and liquidity factors explain a relevant share of the total variation in the basis and help to explain cross country dispersion in the basis.