The Collateral Trap / Frédéric Boissay, Russell Cooper.

Format:

Book

Author/Creator:

Boissay, Frédéric.

Contributor:

National Bureau of Economic Research.

Cooper, Russell.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20703.

NBER working paper series no. w20703

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

Active wholesale financial markets help reallocate deposits across heterogeneous banks. Because of incentive problems these flows are constrained and collateral is needed. The composition of collateral matters. The use of inside assets (loans) creates a "collateral pyramid" in that cash flows from one loan can be pledged to secure another. Through collateral pyramids the financial sector creates safe assets, but at the cost of exposing the economy to systemic panics. Outside collateral (treasuries) serves as foundation of, and stabilises, the pyramid. There is a threshold for the volume of treasuries, below which investors panic and the pyramid collapses.

Notes:

Print version record

November 2014.