Fire buys of ECB collateral assets

Author: Calebe de Roure, Bundesbank

Title: Fire buys of ECB collateral assets

Abstract: In times of financial distress central banks act as lender of last resort to avoid that illiquid banks sell assets at fire sales discounts. However, by creating new demand for collateral assets they induce illiquid banks to pay an extra premium to acquire these assets. This premium I call fire buy premium. 

In late 2008, the ECB simultaneously adopted fixed-rate full allotment tender and loosened the quality threshold in its collateral framework from A- to BBB- allowing banks with difficulties to access the interbank market to draw liquidity from the central bank funds market with lower quality collateral. I use this expansion of the collateral framework as identification scheme for the fire buy premium. Using the fixed income trading book of 26 German banks, I show that the ones that failed later in  the crisis  paid on average a fire buy premium of 11.5 bps to acquire newly eligible assets.