Central bank collateral policy and credit pricing : evidence from Finland

Abstract

We study the effect of collateral eligibility of corporate loans on the pricing of these loans by banks in Finland. Specifically, we investigate whether loans that are pledgeable as collateral for central bank borrowing have lower liquidity premia and thus lower interest rates. For identification, we utilize two unanticipated changes in the collateral framework of the Bank of Finland after the COVID-19 pandemic in 2020 and loan-level corporate credit data from the Finnish implementation of Anacredit. Our main result is that we do not find evidence that collateral pool expansions by the central bank significantly affected interest rates paid by borrowers. The result contrasts with recent findings that imply significant effects of similar collateral pool expansions on credit supply. We hypothesize that differences in the institutional setting and economic environment between countries may explain the contradictory results. Our findings show that collateral policies may not have similar effects on credit pricing in all circumstances.