Collateral Eligibility of Corporate Debt in the Eurosystem
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Date
2020-04-01
Author
Pelizzon, Loriana
Riedel, Max
Simon, Zorka
Subrahmanyam, Marti G.
SAFE No.
275
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Abstract
We study how the Eurosystem Collateral Framework for corporate bonds helps the European Central Bank (ECB) fulfill its policy mandate. Using the ECBs eligibility list, we identify the first inclusion date of both bonds and issuers. We find that due to the increased supply and demand for pledgeable collateral following eligibility, (i) securities lending market trading activity increases, (ii) eligible bonds have lower yields, and (iii) the liquidity of newly-issued bonds declines, whereas the liquidity of older bonds is unaffected/improves. Corporate bond lending relaxes the constraint of limited collateral supply, thereby making the market more cohesive and complete. Following eligibility, bond-issuing firms reduce bank debt and expand corporate bond issuance, thus increasing overall debt size and extending maturity.
Research Area
Financial Markets
Macro and Finance
Systemic Risk Lab
Macro and Finance
Systemic Risk Lab
Keywords
collateral policy, ecb, corporate bonds, corporate debt structure, eligibility premium
JEL Classification
G12, G14, G32, E58
Research Data
Topic
Systematic Risk
Corporate Finance
Financial Markets
Corporate Finance
Financial Markets
Relations
1
Publication Type
Working Paper
Link to Publication
Collections
- LIF-SAFE Working Papers [334]