Pawnbroking – lending money against valuable assets – dates back to biblical times. By some accounts, Queen Isabella of Castile financed Christopher Columbus’s 15th-century discovery of the Americas by pawning her jewels.
The global economic crises of the past five years, however, have taken the principle of secured lending into new, possibly dangerous territory.
As part of the rush to make the financial system safer, investors are pressing banks to provide more collateral – safe assets – as security against more of their funding. Regulators are setting tough rules on the collateral traders must post in case they go bust before a deal is completed. And central banks have piled up ever larger piles of collateral against the liquidity, or cash, they have pumped into economies.