The Impact of Central Clearing on Banks' Lending Discipline

42 Pages Posted: 19 Nov 2013 Last revised: 10 Sep 2016

See all articles by Marc Arnold

Marc Arnold

University of St. Gallen - School of Finance

Date Written: September 7, 2016

Abstract

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

Arnold, Marc, The Impact of Central Clearing on Banks' Lending Discipline (September 7, 2016). Paris December 2016 Finance Meeting EUROFIDAI - AFFI, Available at SSRN: https://ssrn.com/abstract=2356768 or http://dx.doi.org/10.2139/ssrn.2356768

Marc Arnold (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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