Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis

50 Pages Posted: 9 Jul 2019

Date Written: July 20, 2018

Abstract

This paper joins the debate on the growing use of CCPs in interbank markets by analysing a scarcely explored source of risk. Namely, that central clearing may provide riskier banks that are cut off from the bilateral segment with another means of accessing the interbank market, thereby eluding market discipline and potentially increasing the risks borne by the financial system. We investigate this issue using monthly granular data on Italian banks from January 2004 to June 2013, and find that during the global financial crisis riskier banks increased the share of their interbank funding obtained via CCPs due to both the impact of general market uncertainty and heightened attention to counterparty risk in the bilateral segment of the market. More tellingly, we show that, for riskier banks only, this increase was accompanied by a decline in the duration of bilateral relationships, indicating that longer-standing counterparts, typically the most informed ones, withdrew from these relationships. This suggests that, compared with banks operating in the bilateral segment, on average banks working with CCPs may be riskier, confirming the importance of ongoing efforts to ensure that CCPs have a proper risk management framework.

Keywords: CCPs, central clearing, central counterparties, financial crisis, interbank markets, networks, interbank lending relationships

JEL Classification: E58, G21

Suggested Citation

Affinito, Massimiliano and Piazza, GianMatteo, Always Look on the Bright Side? Central Counterparties and Interbank Markets during the Financial Crisis (July 20, 2018). Bank of Italy Temi di Discussione (Working Paper) No. 1181, July 2018, Available at SSRN: https://ssrn.com/abstract=3210673 or http://dx.doi.org/10.2139/ssrn.3210673

Massimiliano Affinito (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

GianMatteo Piazza

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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