A Framework for Collateral Risk Control Determination

48 Pages Posted: 10 Feb 2003

See all articles by Fernando González

Fernando González

European Central Bank (ECB)

Didier Cossin

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Zhijiang Huang

JP Morgan

Daniel Aunon-Nerin

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); FAME

Date Written: January 2003

Abstract

This paper derives a general framework for collateral risk control determination in repurchase transactions. The objective is to treat consistently heterogeneous collateral so that the collateral taker has a similar risk exposure whatever the collateral pledged. The framework measures the level of risk with the probability of incurring a loss higher than a pre-specified level given two well known parameters used to manage the intrinsic risk of collateral: marking to market and haircuts. It allows for the analysis in a closed form of the way in which different relevant factors interact in the risk control of collateral (e.g. marking to market frequency, level of interest rate volatility, time to capture and liquidity risk, counterparty default probability, etc.). The framework, which combines the recent theoretical literature on credit and interest risk, provides an alternative quantifiable and objective approach to the existing more ad-hoc rule-based methods used in haircut determination.

Keywords: Collateral, repurchase transactions, default risk, central banks, monetary policy operations

JEL Classification: E50, E58, G21, G10

Suggested Citation

González, Fernando and Cossin, Didier and Huang, Zhijiang and Aunon-Nerin, Daniel, A Framework for Collateral Risk Control Determination (January 2003). Available at SSRN: https://ssrn.com/abstract=376233 or http://dx.doi.org/10.2139/ssrn.376233

Fernando González (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Didier Cossin

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland
41 21 692 34 89 (Phone)
+41 21 692 33 05 (Fax)

Zhijiang Huang

JP Morgan

London
United Kingdom

Daniel Aunon-Nerin

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

FAME

40, Boulevard du Pont-d'Arve
40, Bd du Pont-d'Arve
1211 Geneva 4, CH-6900
Switzerland

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