I am an economist in the Financial Research Division at the European Central Bank (my CV)
My research interests are: Asset Pricing, Fixed Income and Repo markets, Market Microstucture. My research is both empirical and theoretical.
Disclaimer: This is my private site and the views expressed in the material on these pages are my own and do not reflect those of the European Central Bank
We show that the liquidation value of collateral depends on who is pledging. Using transaction-level data on all overnight repurchase agreements (repo) of 52 large European banks, we find that a loan collateralized by a sovereign bond carries a 3.0 bps rate premium if the borrower is of the same country as the collateral issuer. The main driver is the decrease in liquidation value which occurs when borrower default correlates with collateral value. Accordingly, we show that repo rates increase in the correlation between the borrower's and the collateral issuer's CDS premia, and are high when the borrower is also the collateral issuer. Our results imply that lenders monitor the correlation between borrower default risk and collateral value, and uncover a channel through which the sovereign-bank nexus impacts funding costs.