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Working Paper
What Drives U.S. Treasury Re-use?
Infante, Sebastian; Saravay, Zack (2020-12-18)
We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's secured funding and their outright holdings. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when ...
Finance and Economics Discussion Series , Paper 2020-103

Working Paper
Safe Collateral, Arm's-Length Credit : Evidence from the Commercial Real Estate Mortgage Market
Nichols, Joseph B.; Krainer, John; Black, Lamont K. (2017-05)
When collateral is safe, there are less opportunities for things to go wrong. We examine matching between collateral and creditors in the commercial real estate mortgage market by comparing loans in commercial mortgage backed securities (CMBS) conduits and bank portfolios. We model CMBS financing as lower cost but less informed, such that only safe collateral is funded by CMBS. This prediction is tested using the 2007-2009 shutdown of the CMBS market as a natural experiment. The loans funded by banks that would have been securitized are less likely to default or be renegotiated, indicating ...
Finance and Economics Discussion Series , Paper 2017-056

Working Paper
On Default and Uniqueness of Monetary Equilibria
Vardoulakis, Alexandros; Tsomocos, Dimitrios P.; Lin, Li (2015-05-08)
We examine the role that credit risk in the central bank's monetary operations plays in the determination of the equilibrium price level and allocations. Our model features trade in fiat money, real assets and a monetary authority which injects money into the economy through short-term and long-term loans to agents. Short-term loans are riskless, but long-term loans are collateralized by a portfolio of real assets and are subject to credit risk. The private monetary wealth of individuals is zero, i.e., there is no outside money. When there is no default in equilibrium, there is indeterminacy. ...
Finance and Economics Discussion Series , Paper 2015-34

Report
Endogenous Leverage and Default in the Laboratory
Houser, Daniel; Fostel, Ana; Cipriani, Marco (2019-11-01)
We study default and endogenous leverage in the laboratory. To this purpose, we develop a general equilibrium model of collateralized borrowing amenable to laboratory implementation and gather experimental data. In the model, leverage is endogenous: agents choose how much to borrow using a risky asset as collateral, and there are no ad hoc collateral constraints. When the risky asset is financial?namely, its payoff does not depend on ownership (such as a bond)? collateral requirements are high and there is no default. In contrast, when the risky asset is nonfinancial?namely, its payoff ...
Staff Reports , Paper 900

Working Paper
Asset Pledgeability and Endogenously Leveraged Bubbles
Phan, Toan; Bengui, Julien (2018-04-19)
We develop a simple model of defaultable debt and rational bubbles in the price of an asset, which can be pledged as collateral in a competitive credit pool. When the asset pledgeability is low, the down payment is high, and bubble investment is unleveraged, as in a standard rational bubble model. When the pledgeability is high, the down payment is low, making it easier for leveraged borrowers to invest in the bubbly asset. As loans are packaged together into a competitive pool, the pricing of individual default risk may facilitate risk-taking. In equilibrium, credit-constrained borrowers may ...
Working Paper , Paper 18-11

Working Paper
The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors
D'Amico, Stefania; Fan, Roger; Kitsul, Yuriy (2013-11-29)
In the repo market, forward agreements are security-specific (i.e., there are no deliverable substitutes), which makes it an ideal place to measure the value of fluctuations in a security's available supply. In this study, we quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the repo rates of all the outstanding U.S. Treasury securities. Our results indicate the existence of an economically and statistically significant scarcity premium, especially for shorter-term securities. The estimated scarcity effect is quite ...
Working Paper Series , Paper WP-2013-22

Working Paper
Interest Rate Dynamics, Variable-Rate Loan Contracts, and the Business Cycle
Wen, Yi; Pintus, Patrick A.; Xing, Xiaochuan (2015-09-01)
The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates forecast booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore model accounts for both properties when business-cycle movements are driven, in a significant way, by animal spirit shocks to credit-financed investment demand. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate ...
Working Papers , Paper 2015-32

Working Paper
Transparency and Collateral : Central versus Bilateral Clearing
Carli, Francesco; Carapella, Francesca; Antinolfi, Gaetano (2018-03-08)
Bilateral financial contracts typically require an assessment of counterparty risk. Central clearing of these financial contracts allows market participants to mutualize their counterparty risk, but this insurance may weaken incentives to acquire and to reveal information about such risk. When considering this trade-off, participants would choose central clearing if information acquisition is incentive compatible. If it is not, they may prefer bilateral clearing, when this choice prevents strategic default while economizing on costly collateral. In either case, participants independently ...
Finance and Economics Discussion Series , Paper 2018-017

Report
Is It Too Late to Bail Out the Troubled Countries in the Eurozone?
Conesa, Juan Carlos; Kehoe, Timothy J. (2014-02-05)
In January 1995, U.S. President Bill Clinton organized a bailout for Mexico that imposed penalty interest rates and induced the Mexican government to reduce its debt, ending the debt crisis. Can the Troika (European Commission, European Central Bank, and International Monetary Fund) organize similar bailouts for the troubled countries in the Eurozone? Our analysis suggests that debt levels are so high that bailouts with penalty interest rates could induce the Eurozone governments to default rather than reduce their debt. A resumption of economic growth is one of the few ways that the Eurozone ...
Staff Report , Paper 497

Working Paper
Debt Deflation Effects of Monetary Policy
Vardoulakis, Alexandros; Tsomocos, Dimitrios P.; Lin, Li (2014-05-07)
This paper assesses the role that monetary policy plays in the decision to default using a General Equilibrium model with collateralized loans, trade in fiat money and production. Long-term nominal loans are backed by collateral, the value of which depends on monetary policy. The decision to default is endogenous and depends on the relative value of the collateral to face value of the loan. Default results in foreclosure, higher borrowing costs, inefficient investment and a decrease in total output. We show that pre-crisis contractionary monetary policy interacts with Fisherian debt-deflation ...
Finance and Economics Discussion Series , Paper 2014-37

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