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Never Heard of Collateral Frameworks? You’re not Alone

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Swiss Finance Institute
on
Thursday, May 11, 2017 - 11:00

You may be forgiven for never having heard of collateral frameworks. But they most certainly exist, and they enable central banks to exert influence over financial markets and the real economy.

 

Consider if you were badly in need of cash and your only option was a bank loan. Your bank would set out the terms and conditions, which, in principle and ignoring competitive pressures, can be as generous or as harsh as it likes. The bank will also tell you which asset it is willing to accept as collateral for the loan, and what value it attaches to that asset. Unless your bank’s terms were outrageous, you would probably accept. What other choice would you have?

 

So it is with central banks and their borrowers – in this case, banks. Central banks lend money to banks and determine the terms before agreeing to release the money. While in your case, the collateral may be your house (when applying for a mortgage) or other possession (when applying for a personal loan), for banks, it is a range of marketable and non-marketable financial assets such as government bonds, bank bonds, and non-marketable credit claims.

 

Boiling it down to its most basic terms, therefore, the list of acceptable collateral and the method of valuing them is the collateral framework—or the central bank’s policy on collateral for issuing money. It’s a relatively simple tool, but an extremely effective one that impacts markets and society as a whole. But in a way which is largely unnoticed by the public. As we said, you’ve probably never even heard of it...


Register for the event on 22 June 2017 to learn more about collateral frameworks




Discover the “open secret” of central banking and its implications in an event featuring Mickael Benhaim (Pictet Asset Management), Dr. Andréa M. Maechler (Swiss National Bank), and Professor Kjell G. Nyborg (Swiss Finance Institute & University of Zurich). The event takes place on 22 June 2017 at Zunfthaus zur Schmiden in Zurich.
Register here.


Written by Stuart Garforth, a freelance science writer based in London.

About the Featured Faculty About the Book
Kjell G. Nyborg This article draws on Prof. Kjell G. Nyborg’s «Collateral Frameworks: The Open Secret of Central Banks». The first book-length study of the importance of collateral frameworks in monetary policy, focusing on the Eurozone and euro crisis.