Journal of Financial Market Infrastructures

Is collateral becoming scarce? Evidence for the euro area

Anouk Levels and Jeannette Capel


The global financial crisis has driven several trends in wholesale financial markets that have led to a higher demand for high-quality collateral. More transactions are now secured instead of unsecured on the money market, and, in overthe-counter derivatives markets, central counterparty clearing for standardized contracts becomes mandatory, raising collateral needs for market participants. Moreover, the Basel III liquidity standards will probably increase banks' need for high-quality liquid assets. It is not clear in advance whether the supply of collateral will grow and at what rate. On the one hand, many euro area governments now need to finance high budget deficits. While this is not a favorable development, it does imply that more debt instruments will become available as potential collateral. On the other hand, there are concerns about the creditworthiness of several euro area sovereigns, which limits the debt's collateral value. Due to these developments, some market participants expect that collateral will soon become scarce, which could impair the smooth functioning of financial markets. This paper quantifies the trends in demand for and supply of collateral, and concludes that collateral is likely to become more scarce, but not scarce in absolute terms. We also discuss the expected economic effects and policy implications of this conclusion.