Advertisements

Tag Archive: Systemic risk


3/52 : Dommages collatéraux - Collateral damage

I did this post last year but the essence is clearly visible now so posting it again under new rules and regulations.

Deja vu all over again, the over-reliance on ‘shaky’ collateral and concentration of risk is building once more – this time in the $648 trillion derivatives market. New Clearing House rules (a la Dodd-Frank) mean derivatives counterparties are required to pledge high quality collateral with the clearing houses (or exchanges) in a more formalized manner to cover potential losses.  Continue reading

Advertisements

Bank run Vs CCP run

The term ‘run on a CCP’ has been bandied around a fair amount, but it isn’t entirely obvious what it means. Let me attempt to shine some light 813530onto the idea.

A run on a bank occurs when depositors withdraw deposits quickly. In the days before deposit insurance, bank runs from retail depositors were common as their money was genuinely at risk from bank failure. These runs were damaging as banks which were solvent but not sufficiently liquid (due to demand deposits funding term loans) could fail due to a run. These days, bank runs occur in the wholesale funding market: hence Gorton and Metrick’s influential paper about the run on repo in the 2008 crisis. These repo runs occur if wholesale funders refuse to carry on providing liquidityContinue reading

Shadow Banking

The Topic is not new but the confusion still prevails to many, In the past have already done 4 post on it , the short link been shared below the article.images

There is much confusion about what shadow banking is. Some equate it with securitisation, others with non-traditional bank activities, and yet others with non-bank lending. Regardless, most think of shadow banking as activities that can create systemic risk. This column proposes to describe

shadow banking as ‘all financial activities, except traditional banking, which require a private or public backstop to operate’.

Backstops can come in the form of franchise value of a bank or insurance company, or a government guarantee. The need for a backstop is a crucial feature of shadow banking, which distinguishes it from the “usual” intermediated capital market activities, such as custodians, hedge funds, leasing companies, etc.  Continue reading

A few good articles are up on the topics of collateral and clearing:   images

This article on Bloomberg highlights the fact that banks will be prepared to use the cheapest collateral possible, regardless of quality. That could of course have quite an impact on the objective of “systemic risk reduction”.

Similarly this article in IFR looks at the looming rules on Initial Margin on uncleared trades. If widely applied, it could discourage hedging by end users, thus also negating the desired system risk reduction of the rules.  Continue reading

I did this post last year but the essence is clearly visible now so posting it again under new rules and regulations. images

Deja vu all over again, the over-reliance on ‘shaky’ collateral and concentration of risk is building once more – this time in the $648 trillion derivatives market. New Clearing House rules (a la Dodd-Frank) mean derivatives counterparties are required to pledge high quality collateral with the clearing houses (or exchanges) in a more formalized manner to cover potential losses.   Continue reading

%d bloggers like this: