This paper explores the importance of geographies of bank funding for the design of central banks’ crisis interventions in financial markets. It first distinguishes between market-based and bank-based measures to then focus on the collateral management strategies of European banks, in the context of an increasing reliance on secured market funding, to discuss a crucial policy challenge in monetary unions with integrated funding markets: banks’ ability to access market funding depends on existing portfolios of marketable collateral – in Eurozone mainly sovereign bonds. The constraints on the central bank’s ability to stabilize markets for collateral may thus worsen banks’ funding conditions through ‘coordinated risks’ between counterparty (bank) and collateral (sovereign). Since bank-based crisis policies cannot offer effective solutions for preserving the role of sovereign bonds as marketable collateral, the dilemma of how to stabilize funding markets within the existing European institutional architecture remains unresolved.
Gabor, D. (2012). The power of collateral: The ECB and geographies of bank funding. https://doi.org/10.2139/ssrn.2062315