Macroprudential Regulation Under Repo Funding

September 1, 2010

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Format: Chicago

Laura Valderrama. Macroprudential Regulation Under Repo Funding, (USA: International Monetary Fund, 2010) accessed December 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The use of collateral has become one of the most widespread risk mitigation techniques. While it brings stabilizing effects to the individual lender we argue that it may exacerbate systemic risk through margin call activation. We show how a liquidity shock to the cash lender may propagate as a solvency shock via liquidity hoarding even if the cash lender remains solvent in all states of nature. Albeit a cost-effective response of the cash lender to a liquidity shock, liquidity hoarding may lead to the bankruptcy of its repo counterparties triggering contagion across asset classes. To buttress the resilience of the financial system, we lay out a menu of macroprudential policies that deactivate this channel of financial contagion.

Subject: Asset and liability management, Collateral, Financial contagion, Financial institutions, Financial sector policy and analysis, Financial statements, Liquidity, Public financial management (PFM), Systemic risk

Keywords: Capital base, Collateral, Financial Contagion, Financial statements, Global, Haircut, Interbank market, Liquidity, Liquidity Hoarding, Liquidity shock, Long-term debt, Macroprudential Regulation, Margin call, Repo borrower, Repo lender, Repurchase Agreement, Systemic Risk, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/220
Stock No:

WPIEA2010220
ISBN:

9781455208852
ISSN:

1018-5941

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