The Economics of Collateral

52 Pages Posted: 23 Apr 2014

See all articles by Ronald W. Anderson

Ronald W. Anderson

London School of Economics & Political Science - Department of Finance; Centre for Economic Policy Research (CEPR); Sun Yat-sen University (SYSU) - Xinhua College

Karin Jõeveer

Tallinn University of Technology (TUT)

Date Written: April 21, 2014

Abstract

In this paper we study how the use of collateral is evolving under the influence of regulatory reform and changing market structure. We start with a critical review of the recent empirical literature on the supply and demand of collateral which has focussed on the issue of 'collateral scarcity'. We argue that while limited data availability does not allow a comprehensive view of the market for collateral, it is unlikely that there is an overall shortage of collateral. However, it is quite possible that there may be bottlenecks within the system which mean that available collateral is immobilized in one part of the system and unattainable by credit-worthy borrowers. We then describe how these problems sometimes can be overcome by improved information systems and collateral transformation. We discuss how collateral management techniques differ between banks and derivatives markets infrastructures including, in particular, CCPs. In order to assess the impact of alternative institutional arrangements on collateral demand, we introduce a theoretical model of an OTC derivatives market consisting of investors and banks arrayed in several regions or market segments. We simulate this model under alternative forms meant to capture the implications of moving to mandatory CCP clearing and mandatory initial margin requirements for non-cleared OTC derivatives.

Keywords: collateral, shadow banking, CCPs, OTC derivatives reform, repo, securities lending

JEL Classification: G18, G21, G28

Suggested Citation

Anderson, Ronald W. and Jõeveer, Karin, The Economics of Collateral (April 21, 2014). Available at SSRN: https://ssrn.com/abstract=2427231 or http://dx.doi.org/10.2139/ssrn.2427231

Ronald W. Anderson (Contact Author)

London School of Economics & Political Science - Department of Finance ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6204 (Phone)
+44 20 7955 7420 (Fax)

HOME PAGE: http://personal.lse.ac.uk/ANDERSOR/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Sun Yat-sen University (SYSU) - Xinhua College ( email )

China

Karin Jõeveer

Tallinn University of Technology (TUT) ( email )

Ehitajate tee 5
Tallinn, 12618
Estonia

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