Using bond-level data from both repo and securities lending markets, this paper introduces a new measure of collateral reuse and studies the drivers of the cost of obtaining high-quality collateral, i.e. the collateral scarcity premium, proxied by specialness of government bond repos.
Researchers find that the cost of obtaining high-quality collateral increases with demand pressures in the cash market (short-selling activities), even in calm financial market conditions. In bear market conditions ‒ when good collateral is needed the most ‒ this could lead to tensions in some asset market segments. Collateral reuse may alleviate some of these tensions by reducing the collateral scarcity premia. Yet, it requires transparency and monitoring due to the financial stability risks associated.
Also, researchers find that the launch of the ECB quantitative easing program has a statistically significant, albeit limited, impact on sovereign collateral scarcity premia, but this impact is offset by the beginning of the ECB Securities Lending Program.