Is collateral becoming scarce? : evidence for the euro area

The global financial crisis has propelled several trends in wholesale financial markets that are causing an increase in the demand for high-quality collateral. On the money market more transactions are now secured instead of unsecured and in OTC derivatives markets CCP clearing for standardized contracts becomes mandatory, raising collateral needs for market participants. Moreover, the Basel III liquidity standards will probably increase banks need for high-quality liquid assets. It is not clear in advance whether the supply of collateral will grow and at which rate. On the one hand, many euro area governments now need to finance high budget deficits. While this is not a favourable development, it does imply that more debt instruments will become available as potential collateral. On the other hand, there are concerns about the creditworthiness of several euro area sovereigns which limits the debts collateral value. Due to these developments, some market participants expect that collateral will become scarce in the near future, which could impair the smooth functioning of financial markets. This study quantifies the trends in demand for and supply of collateral and concludes that collateral is likely to become scarcer but not scarce in absolute terms. It also discusses the expected economic effects and policy implications of this conclusion.