European Parliament Library

Macroprudential Regulation Under Repo Funding, Laura Valderrama

The use of collateral has become one of the most widespread risk mitigation techniques. While it brings stabilizing effects to the individual lender we argue that it may exacerbate systemic risk through margin call activation. We show how a liquidity shock to the cash lender may propagate as a solvency shock via liquidity hoarding even if the cash lender remains solvent in all states of nature. Albeit a cost-effective response of the cash lender to a liquidity shock, liquidity hoarding may lead to the bankruptcy of its repo counterparties triggering contagion across asset classes. To buttress the resilience of the financial system, we lay out a menu of macroprudential policies that deactivate this channel of financial contagion
Table Of Contents
Contents; I. Introduction; II. Stylized Facts; Figures; 1. Correlation between ABX and LIBOR-OIS spread; Tables; 1. Haircut and Credit Risk; 2. Correlation between GBI return and LIBOR-OIS spread; A. An Example of Capital Shortage under Basel II; B. An Example of the Liquidity Risk Standards proposed by the Basel Committee; 2. Illustration of capital shortage for market risk under Basel II; III. The Model; A. The Players; 1. The Repo Market Lender; 2. The Noise Traders; 3. The Repo Market Borrowers; B. The Shock; IV. Main Results; A. Margin Call satisfied with cash transfer
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (39 p.)
Specific Material Designation
Form Of Item

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