Central bank operating frameworks and collateral markets

Report submitted by a Study Group established by the Committee on the Global Financial System and the Markets Committee. The Group was chaired by Timothy Lane (Bank of Canada).

Collateral markets have become increasingly important as demand for collateral assets has increased in recent years, driven by changing market practices and an evolving regulatory landscape. This report explores whether and how the design of central banks' operational frameworks influences private collateral markets, including collateral availability, pricing, related market practices, and market performance under stress. It studies these issues by reviewing available information from a range of sources, including central bank case studies as well as surveys and interviews with private sector participants in collateral markets.

Central banks influence markets for collateral through either the supply of assets available for use as collateral (a scarcity channel), the pledgeability of assets in private transactions (a structural channel), or both. They therefore have a variety of design choices at their disposal to influence collateral markets as well as to fine-tune the effects of their operations on these markets. While central bank operating frameworks are not usually the most important factor influencing collateral markets, the evidence presented in this report indicates that the influence of central banks may at times be significant, in particular during crisis times. This highlights the importance of carefully monitoring the effects of central bank operations on collateral markets, as well as the need for central banks to examine their operational frameworks to ensure preparedness for any future crisis response.

JEL classification: E58, G21, G32

Keywords: Pledgeability, collateral availability, central bank operations, crisis preparedness