The Collateral Composition Channel

Wholesale financial markets reallocate deposits. Because of incentive problems, these flows are limited by endogenous collateral constraints. The composition of collateral matters. The use of inside collateral creates a "collateral pyramid": cash flows from one loan are pledged to secure another. Outside collateral, such as treasuries, stabilizes the pyramid. Through collateral pyramids the financial sector sustains a large volume of reallocation across banks, but at the cost of systemic panics. During panics, the safe asset creation process stalls, the pyramid collapses, collateral becomes scarce. Markets are more fragile when loans are secured by inside collateral.

• Publication year

  2020

• Venue

  American Economic Journal: Macroeconomics

• Publication date

  Unknown publication date

• Fields of study

  Business, Economics

• Identifiers
  DOI 10.1257/mac.20170097
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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