The unintentional effects of Eurosystem’s collateral framework on corporate debt structure
Authors: Max Riedel (Goethe University and SAFE)
Title: The unintentional effects of Eurosystem’s collateral framework on corporate debt structure
Abstract: The Eurosystem's list of eligible marketable assets ensures that banks pledge high-quality assets when borrowing from the ECB. The list is rigorously monitored by national central banks and updated on a daily basis. A deliberate expansion and contraction of this list is part of ECB's monetary policy that can have intended and - as I show - potentially unintended effects on the real economy. In this novel study I focus on European corporate bonds and show that collateral eligibility has a significant and long-lasting effect on the debt structure of bond-issuing firms. I overcome endogeneity issues by exploiting the legal properties of Eurosystem's collateral framework. My findings show that a certain subset of bond-issuing firms is likely to substitute bank debt with bond debt as a consequence of an unexpected collateral eligibility announcement. A potential explanation for this behavior is that firms associate eligibility with lower refinancing costs. I observe that (i) eligible bonds trade at relatively lower yields and (ii) demand for eligible bonds increases in both, the bond and the securities lending market. As a result, firms exploit the increased market demand by issuing public debt at lower rates and with longer maturity.