Counterparty Risk, Impact on Collateral Flows and Role for Central Counterparties
International Monetary Fund (IMF)
affiliation not provided to SSRN
IMF Working Paper No. 09/173
Counterparty risk in the United States stemming from exposures to OTC derivatives payables (after netting) is now concentrated in five banks?Goldman Sachs, JPMorgan, Bank of America, Morgan Stanley and Citi. This note analyzes how such risks have shifted over the past year. We estimate that the adverse impact of counterparty risk on high-grade collateral flows and global liquidity due to decrease in rehypothecation, reduced securities lending, and hoarding of cash by major banks is at least $5 trillion. In order to mitigate counterparty risk, there have been regulatory initiatives to establish central counterparties (CCPs). From a policy perspective, counterparty risk remains large at present and recent experience has shown that OTC derivative positions are not supported by sufficient capital, constituting a major risk for participants in this market.
Number of Pages in PDF File: 16
Keywords: Banking sector, Bankruptcy, Banks, Bonds, Capital markets, Financial institutions, Financial instruments, Financial risk, Nonbank financial sector, Securities marketsworking papers series
Date posted: August 19, 2009
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