Authors: Jung-Hyun Ahn, Vincent Bignon, Régis Breton,
and Antoine Martin
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The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
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Staff Reports
Liquidity, Collateral Quality, and Negative Interest Rate
Previous title: "Interbank Market and Central Bank Policy"
January 2016 Number 763
Revised September 2023
Revised September 2023
JEL classification: E58, G21, G28
We analyze how banks manage liquidity between cash and marketable securities and its impact on the refinancing of projects subject to a liquidity shock. Securities can be pledged as collateral to acquire additional cash but are an imperfect hedge because their quality is uncertain. We show that banks may hold too much or too little cash in equilibrium compared to the first-best level, depending on the dispersion of securities value. Furthermore, the equilibrium relationship between the dispersion and banks cash holding is non-monotonous. We use this framework to assess the impact of liquidity regulation and negative interest rate policy.
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