Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/149566 
Year of Publication: 
2016
Series/Report no.: 
Bundesbank Discussion Paper No. 51/2016
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
In times of financial distress, central banks provide unlimited liquidity to avoid fire sales. In response, banks raise their demand for collateral assets, and the short-term scarcity of collateral securities leads to higher prices, the Fire Buy premium. To avoid collateral scarcity, central banks increase the set of eligible collateral assets. However, if the risk-shifting channel is open for these newly eligible securities, banks prefer to pledge them and pay another premium, the Risk-Shifting premium. With the full fixed-income trading book of 26 German banks, I identify each trade of each bank and investigate how unlimited liquidity provision affects collateral prices. Also, I match banks' trades with their balance sheet and show how funding liquidity impacts premia payment. I quantify the Fire Buy premium to be 15.6 bps; and the Risk-Shifting premium on BBB-rated assets to be 65.6 bps.
Subjects: 
Fire Buy
Risk-Shifting
Haircut Subsidy
ECB
Over-the-Counter Markets
JEL: 
E41
E44
E58
G11
G14
G15
G21
ISBN: 
978-3-95729-333-6
Document Type: 
Working Paper

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