Bank Funding and Financial Stability

The crisis of 2007–2008 was a crisis of collateral. Since then, financial market participants – particularly in the euro area and the United States – have shown an increased appetite for secured lending. In short-term bank funding markets, there has been a pronounced shift towards repurchase arrangements. And covered bonds have gained in popularity in long-term funding markets. The cyclical flight to safety, driven by market forces, has been reinforced by regulatory developments. These include reforms to over-the-counter derivative markets that emphasise more stringent collateralisation, preferential regulatory treatment of covered bonds, and the prospect of statutory ‘bail-in’ tools for financial regulators.