In global financial centers, short-term market rates are effectively determined in the pledged collateral market, where … banks and other financial institutions exchange collateral (such as bonds and equities) for money. Furthermore, the use of … long-dated securities as collateral for short tenors-or example, in securities-lending and repo markets, and prime …

collateral to support arbitrage trades. We show that with volatile asset demands, arbitrage becomes risky. With information … frictions, a looser collateral policy might render the economy more vulnerable to extremely large demand shocks, while a tighter … collateral constraint helps maintain the stability at the cost of market liquidity supply …