Velocity of Pledged Collateral: Analysis and Implications
IMF Working Papers, November 1, 2011
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- Velocity of Pledged Collateral: Analysis and Implications
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Bibliographic details
- Authors: Manmohan Singh
- Published: November 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463923952.001
Key findings and summary
- Large banks and dealers use and reuse collateral pledged by nonbanks, which helps lubricate the global financial system.
- The supply of collateral arises from specific investment strategies in the asset management complex, with the primary providers being hedge funds, pension funds, insurers, official sector accounts, money markets and others.
- Post-Lehman, there has been a significant decline in the source collateral for the large dealers that specialize in intermediating pledgeable collateral.
- Since collateral can be reused, the overall effect (i.e., reduced "source" of collateral times the velocity of collateral) may have been a $4-5 trillion reduction in collateral.
- This decline in financial lubrication likely has impact on the conduct of global monetary policy.
Providers and sources of collateral
- Primary providers: hedge funds, pension funds, insurers, official sector accounts, money markets, and others.
- Supply of collateral is linked to specific investment strategies within the asset management complex.
Quantitative estimate
- Estimated reduction in collateral due to lower source collateral combined with velocity effects: $4-5 trillion.
Implications for monetary policy and financial lubrication
- The decline in available and reusable collateral reduces "financial lubrication" in the global financial system.
- Reduced financial lubrication likely affects the conduct of global monetary policy.
Regulatory effects and policy environment
- Recent regulations aimed at financial stability focus on building equity and reducing leverage at large banks/dealers.
- Such regulations may also reduce financial lubrication in the nonbank/bank nexus by limiting the ability of large dealers to intermediate pledgeable collateral.
Source: IMF Working Paper "Velocity of Pledged Collateral: Analysis and Implications" by Manmohan Singh, November 1, 2011.
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