Macroprudential Regulation Under Repo Funding
Electronic Access:
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Summary:
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.
Series:
Working Paper No. 2010/220
Subject:
Asset and liability management Collateral Financial contagion Financial institutions Financial sector policy and analysis Financial statements Liquidity Public financial management (PFM) Systemic risk
English
Publication Date:
September 1, 2010
ISBN/ISSN:
9781455208852/1018-5941
Stock No:
WPIEA2010220
Pages:
37
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