Thank you Alexis. Perhaps it has to do with leverage. Whereas cash (well, really deposits at the bank) is not readily useful for multiplying one could put up X in German Bunds and receive X + Y in deposit credits. Also, if one was so inclined, you could relend the same piece of collateral a few times and earn some extra profit off of one security.

It’s all rather murky but sometimes collateral is more valuable than cash itself. I believe the best real-world example of that are repurchase agreement failures to deliver and receive. Both the Depository Trust & Clearing Corporation and New York Federal Reserve produce a report on this. My interpretation of the data suggests that during periods of illiquidity banks refuse to hand over the collateral they promised they would. They are so in need of it that they would rather pay a penalty rate than hand the security back over. They rather hold the security then receive cash.