Collateral effect at the E.C.B. main refinance operations - A regional analysis

Abstract

In this paper, I initiate the empirical research on the efficiency of the European Central Bank Main Refinance Operations. The focus is on the haircuts applied to assets used as collateral on the weekly liquidity provision operations and if there is a regionality additional dicount based on reputation and other non-economic characteristics between North Euro- pean Countries (Austria, Belgium, France, Germany, Netherlands) and the European Periphery. One base model and three extensions are tested to discover this potential. A credit ratings extension to the base model, a banking sector group of variables added to the base model and a model that only contains the banking sector variables form the extension models. No sufficient indication of regionality in the haircut collateral has been discovered, with critical factors in the formation of haircuts to be Non-Performing Loans ratio, Loans to Deposits ratio, EONIA Rate and Debt to GDP. Asset encumbrance also shows statistical importance but through a converse relationship to the established literature. On the final extension, there is a signal of country-specific positive effects on collateral haircuts.