"Collateral Eligibility of Corporate Debt in the Eurosystem"
Abstract: Under the unique institutional framework of the Eurosystem, we study how central bank collateral eligibility of corporate bonds induces externalities that help the ECB to fulfill its policy mandate. Using the eligible asset list of the Eurosystem Collateral Framework, we identify the first inclusion date of both individual bonds and issuer firms. Following this event, we find that, due to the increased supply of and demand for pledgeable collateral, (i) trading activity in the secondary market for collateral, the securities lending market, increases, (ii) eligible bonds trade at lower yields due to the liquidity service of pledgeability, and (iii) newly-issued bonds liquidity declines, whereas the liquidity of older bonds does not change, or even improves. Our evidence suggests that the existence of corporate bond lending relaxes the constraint of limited collateral supply, thereby making an otherwise fragmented market more cohesive and complete. Moreover, we observe that, following bond-issuing firms first-time eligibility list inclusion, they reduce bank debt and expand corporate bond issuance activity, thus increasing the overall size and their maturity of total debt.
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