Central banks should take on more credit risk during stress – BoE paper
Research claims generous credit terms can be more efficient than cutting the risk-free interest rate
Central banks should consider taking on greater levels of credit risks and lend to risky market participants at more favourable rates during times of stress, according to a Bank of England staff working paper published on June 23.
The paper, Collateral requirements in central bank lending, uses a model of central bank intervention in collateralised credit markets that combines credit and leverage cycle approaches to demonstrate that when a downturn “is severe”, it is “optimal” for the central
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