We recommend that our readers be aware of a new Bank for International Settlements report, “Central bank collateral frameworks and practices,” released today. The summary data on how much collateral pledged to central banks is unique, to our reading. We think that the role of central banks in collateral acceptance is extremely important and were actually planning a report on the topic, but we may have to rethink that plan since the BIS just put out this study. The key findings of the report are below.
? The information gathered illustrates different styles of collateral frameworks – in terms not only of eligible asset types, but also of other dimensions such as eligibility across lending facilities, haircut policies, collateral management (earmarked or in a pool), etc. The observed diversity reflects differences in local factors such as central bank legislation, financial market structure and state of development, and whether there is a structural liquidity surplus or deficit in the relevant financial system. That said, there are clearly some common principles underpinning these frameworks (eg transparency of eligibility criteria, centrality of risk management measures).
? Central banks in the sample have modified their collateral frameworks over the past five years to varying degrees. These modifications reflect changes in the operating environment and the lessons learned during the global financial crisis – though not all modifications are direct consequences of the crisis. Overall, central bank collateral frameworks today tend to be somewhat broader than in mid-2007, accepting more asset types, including in some cases cross-border collateral. The haircut/initial margin schedules today tend to be more granular, reflecting the information gained about the performance of different asset classes over time, and particularly in stressed conditions during the crisis.
? Notwithstanding a few exceptions, the amount of collateral pledged to central banks typically increased during 2008–09 and declined afterwards. In some cases, this pattern reflects a stabilisation of market conditions since 2009, but in some others it reflects the adoption of non-conventional policies such as large scale outright asset purchases, reducing the need for central banks to lend against collateral.
? There is considerable diversity in the composition of collateral across central banks and across time. Notably, the data suggest that central banks with wide frameworks do not always receive the full range of eligible collateral, nor do they always attract the least liquid assets, though the tendency for the latter is greater in stressed times than in less volatile times. Central banks can and do influence the relative cost of pledging different types of eligible collateral by adjusting haircuts/initial margins and/or the pricing of lending operations and facilities (if collateral eligibility differs across operations and facilities).
Here is the BIS’s summary on what collateral central banks are accepting these days (click on the table for a better view):