Journal of Financial Market Infrastructures

Risk.net

Collateral flows and balance sheet(s) space

Manmohan Singh

  • Bilateral collateral market remains misunderstood.
  • Monetary policy is in unchartered waters with central banks sitting on good collateral while regulations desiring more good collateral. 
  • Policies are not in sync and often orthogonal to each other.

ABSTRACT

Collateral does not flow in a vacuum; it needs balance sheets to move within the financial system. The new regulations constrain private sector bank balance sheets and thus impede market plumbing. This paper looks at securities-lending, derivatives and prime-brokerage markets as suppliers of collateral (as much has been written on the repo market). Going forward, the choice of balance sheet(s), private or public, should be driven by market forces and not by the ad hoc allocation of central banks. Otherwise, this may be suboptimal for monetary policy transmission.

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