Collateral Velocity

Manmohan Singh

A great deal of short-term financing is generally extended by private agents against financial collateral. The collateral intermediation function is likely to become more important over time. This chapter looks at a new concept: collateral reuse (or velocity) in the market. Although there is large issuance of good collateral, very little reaches the market. We describe how to measure this reuse rate and why this metric is increasingly important for policymakers to understand, especially when there is a shortage of collateral.¹¹Note that the sum of the elements of the rows of is always strictly less than 1. This means that the infinite Taylor series converges and hence, has a well-defined inverse.

Sources Of Collateral

In the global financial system, the non-banks generally allow reuse of their collateral in lieu of other considerations. The key providers of (primary) collateral to the “street” (or large banks/dealers) are:

❏ hedge funds (HFs);

❏ custodians on behalf of pension, insurers, official sector accounts and so forth; and

❏ commercial banks that liaise with dealers (this is relatively small compared with the supply from HFs and custodians).

Typically, HFs are