BANK FUNDING AND FINANCIAL STABILITY Preliminary: Do Not Quote without Permission

The crisis of 2007-8 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 also been reinforced by regulatory developments. These include reforms to OTC markets that emphasize more stringent collateralization, preferential regulatory treatment of covered bonds, and the prospect of statutory ‘bail-in’ tools for financial regulators.