Quantifying the Eligibility Premium: Analysis of an ECB Collateral Policy

The eligibility premium affects the value of securities that can be used as collateral in the central bank's lending operations. Being included in the collateral list of a central bank influences a security's price positively and therefore reduces the borrowing costs of issuing such a bond. This ultimately affects the choice of capital structure of the company that issues bonds, which can be pledged as collateral in the open market operations of the central bank.

I apply a difference-in-differences framework to a change in the collateral policy by the ECB to quantify the eligibility effect. This policy exogenously added a set of securities to the collateral list. Focusing on corporate bonds I finds that a bond's borrowing costs went down once it was included in the collateral pool. Additionally, companies that issued eligible bonds increased their leverage.