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Securities loans collateralized by cash: reinvestment risk, run risk, and incentive issues

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  • Frank M. Keane

Abstract

Securities loans collateralized by cash are by far the most popular form of securities-lending transaction. But when the cash collateral associated with these transactions is actively reinvested by a lender?s agent, potential risks emerge. This study argues that the standard compensation scheme for securities-lending agents, which typically provides for agents to share in gains but not losses, creates incentives for them to take excessive risk. It also highlights the need for greater scrutiny and understanding of cash reinvestment practices?especially in light of the AIG experience, which showed that risks related to cash reinvestment, by even a single participant, could have destabilizing effects.

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  • Frank M. Keane, 2013. "Securities loans collateralized by cash: reinvestment risk, run risk, and incentive issues," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 19(May).
    • Handle: RePEc:fip:fednci:y:2013:i:may:n:v.19no.3
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    References listed on IDEAS

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    1. Tobias Adrian & Brian Begalle & Adam Copeland & Antoine Martin, 2013. "Repo and Securities Lending," NBER Chapters, in: Risk Topography: Systemic Risk and Macro Modeling, pages 131-148, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Viktoria Baklanova & Adam Copeland & Rebecca McCaughrin, 2015. "Reference Guide to U.S. Repo and Securities Lending Markets," Working Papers 15-17, Office of Financial Research, US Department of the Treasury.
    2. Nathan Foley-Fisher & Borghan Narajabad & Stephane Verani, 2016. "Securities Lending as Wholesale Funding: Evidence from the U.S. Life Insurance Industry," NBER Working Papers 22774, National Bureau of Economic Research, Inc.
    3. Nathan Foley-Fisher & Stefan Gissler & Stephane Verani, 2019. "Over-the-Counter Market Liquidity and Securities Lending," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 272-294, July.
    4. Zoltan Pozsar, 2014. "Shadow Banking: The Money View," Working Papers 14-04, Office of Financial Research, US Department of the Treasury.
    5. Viktoria Baklanova & Cecilia Caglio & Marco Cipriani & Adam Copeland, 2019. "The Use of Collateral in Bilateral Repurchase and Securities Lending Agreements," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 228-249, July.
    6. Joachim Keller & Antoine Bouveret & Cristina Picillo & Zijun Liu & Julien Mazzacurati & Philippe Molitor & Jonas Söderberg & John Theal & Francesco de Rossi & Romain Calleja, 2014. "Securities financing transactions and the (re)use of collateral in Europe – An analysis of the first data collection conducted by the ESRB from a sample of European banks and agent lenders," ESRB Occasional Paper Series 06, European Systemic Risk Board.
    7. Keller, Joachim & Bouveret, Antoine & Picillo, Cristina & Liu, Zijun & Mazzacurati, Julien & Molitor, Philippe & Söderberg, Jonas & Theal, John & de Rossi, Francesco & Calleja, Romain, 2014. "Securities financing transactions and the (re)use of collateral in Europe – An analysis of the first data collection conducted by the ESRB from a sample of European banks and agent lenders," ESRB Occasional Paper Series 6, European Systemic Risk Board.
    8. Ahn, Jungkyu & Ahn, Yongkil, 2023. "Clogged pipes in the repo market," Finance Research Letters, Elsevier, vol. 57(C).

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