For example, Adrian and Shin (2008) demonstrate that the balance sheets of US broker/dealers expand when monetary policy is accommodative. 6 Similar evidence is provided for the US repo market by Gorton and Metrick (2009), who found that activity started to increase significantly from 2001 – that is, at a time when monetary policy in the US was relatively loose following the bursting of the dot-com bubble. 7 Acharya and Schnabl (2010) provide similar evidence related to the asset-backed commercial paper (ABCP) market. 8 In summary, if the process that has been set in motion under the aegis of the G20 has the potential to place a whole new segment of finance under regulatory scrutiny and oversight, the new collateral-based finance can give a central bank stronger influence over financial and macroeconomic conditions more broadly. 5. Monetary policy in a high-debt environment  I mentioned earlier that collateral is likely to play a growing role in the functioning of capital markets. Demand for collateral is thus likely to increase. But, given the collapse of securitisation activity during the crisis, we could imagine that the current decline in the creation of securitised assets might become a permanent feature of the new landscape. There will be fewer ABSs created out of bank books. Sovereign debt will certainly be widespread. It will probably replace ABSs in the collateralisation of secured lending. Unlike in the past, the risk characteristics of this type of debt instrument will be more graduated than was considered possible only few years ago.
When a central bank takes decisions on the policy rates, it directly affects the marginal price of leverage for these financial institutions. 4 As a result, the behaviour of financial intermediaries – which, by their nature, have high levels of leverage – can be strongly influenced by even small changes in short-term rates. 5 In  3  See Figure 3.1 of T. Adrian and H.S. Shin (2009), “Financial intermediaries and monetary economics,” Handbook of Monetary Economics, forthcoming. 4  See: T. Adrian and H.S. Shin (2009), “Financial intermediaries and monetary economics,” Handbook of Monetary Economics, forthcoming. 5  See: R.G. Rajan (2005), “Has financial development made the world riskier?” Proceedings of the FRB Kansas City Jackson Hole symposium “The Greenspan years: Lessons for the future”; and F. Allen and D. Gale (2007), Understanding financial crises, Oxford University Press. BIS Review 83/2010  5  other words, short-term interest rates are important in and of themselves, not only because they influence longer-term rates and other asset prices via expectations of future short-term rates, but also because they change the liquidity conditions faced by a large portion of leveraged institutions. A number of empirical studies have explored this issue. In line with the assumption that lower short-term interest rates reduce the cost of leverage and thus encourage an expansion of intra-financial sector transactions, these studies find that money market activity, particularly in the secured segment, expands when monetary policy is accommodative.