The Changing Collateral Space

Collateral does not travel in a vacuum; it needs (on- or off-) balance sheet space to flow through the financial system. This chapter provides a snapshot of the changing collateral space and how it may shape the global demand supply for collateral. We first identify the key collateral pools (relative to the old collateral space that existed during pre-Lehman days). However, post-Lehman, official sector efforts via quantitative easing (QE) are significantly altering the collateral space. Moreover, regulatory demands stemming from Basel III, DoddFrank, EMIR, etc, new debt issuance and collateral connectivity via custodians will also affect collateral movements.

Introduction

The importance of collateral has been investigated in several strands that relate to each other in the theoretical literature. One strand is that on collateral and default, which has primarily focused on the role of margin and haircuts and fire sales (Geanakoplos 2003; Krishnamurthy, Nagel and Orlov 2010). Another strand is on securitisation, where collateral serves to support specific asset values (Shleifer and Vishny 2011). However, this chapter is not about hair-cuts, fire sales, or securitisation but about