Central banks have significantly increased their influence over collateral flows, and regulators should consider policies to monitor their activity, a report from the Bank of International Settlements (BIS) has found.
The report found that the importance of central bank activity in collateral markets has increased dramatically since the financial crisis, in which their activities could affect these markets in a variety of ways, both intentionally and unintentionally.
“The potential effects of central bank operations on collateral markets are more important than ever, given the substantial footprint many central banks have left in markets for assets that also serve as collateral,” the report says.
Central banks have a number of ways in which they can influence markets for collateral, either through the supply of assets available for collateral, or through monetary policy on securities lending transactions such as the imposition of haircuts.
The report, submitted by a Study Group established by the Committee on the Global Financial System and Markets Committee, also states central banks are more likely to become involved in collateral markets during times of financial crisis, in which their influence will be significant.
“They are more likely to attempt to directly influence the functioning of collateral markets, for example by introducing facilities that allow banks to post illiquid collateral assets in place of liquid securities that, in turn, can be used to obtain funding in the private market,” the report adds.
The report calls for regulators to examine possible frameworks on how central banks should operate in collateral markets. This includes the adequacy of available inventories of collateral assets, and of central banks’ risk management capabilities.