infonet-economy

The fact that collateral whose function is to secure repayment via its attributed low credit and liquidity risk is traded prominently in a "shadow" banking environment may still go unnoticed. This article analyzes the role of credit rating agency (CRA) ratings in the construction of collateral using the example of sovereign ratings as eligibility criterion for sovereign bonds used as collateral in private and central bank repo transactions. By means of the collateral framework of the ECB, it shows how the epistemic authority of CRAs in terms of sovereign creditworthiness is `constantly being both constructed and worn away' (Sinclair 1999, p. 165) by the central bank itself.

Taking into account how sovereign ratings inform the eligibility of sovereign bonds as collateral, allows to explain the potential of sovereign rating downgrades to drain the liquidity on the interbank market, highlighting one crucial dimension of the politics of shadow banking practices.