Stabilising virtues of central banks haircuts: (Re)matching bank liquidity

During the euro area sovereign debt crisis, the ECB implemented several adjustments to its collateral and haircut policies as part of its whole set of non-standard monetary policy measures. While haircut grids may sound like an obscure, merely technical aspect of monetary policy implementation, they turn out to be a key translator of monetary policy loosening with a direct impact on bank balance sheets, the shadow value of their assets and how encumbered they are. Changing haircuts immediately affects the quantity of liquidity that banks can claim against their collateral in open market operations (OMOs).

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