The Impact of Central Clearing on Banks' Lending Discipline
42 Pages Posted: 19 Nov 2013 Last revised: 10 Sep 2016
Date Written: September 7, 2016
This article investigates the impact of central clearing in credit risk transfer markets on a loan-originating bank's lending behavior. Access to central clearing changes the bank's optimal loan risk hedging strategy so as to undermine lending discipline. The effect on lending discipline depends crucially on the regulatory design of central clearing in terms of capital requirements, disclosure standards, risk retention, and access to uncleared credit risk transfer. I also show that lending discipline is an important channel to assess the total impact of central clearing on systemic risk.
Keywords: Credit Risk Transfer, Central Clearing, Lending Discipline, Systemic Risk
JEL Classification: G18, G28
Suggested Citation: Suggested Citation