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Counterparty Risk, Impact on Collateral Flows and Role for Central Counterparties

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Author Info
James Aitken
Manmohan Singh
Abstract

Counterparty risk in the United States stemming from exposures to OTC derivatives payables (after netting) is now concentrated in five banks?Goldman Sachs, JPMorgan, Bank of America, Morgan Stanley and Citi. This note analyzes how such risks have shifted over the past year. We estimate that the adverse impact of counterparty risk on high-grade collateral flows and global liquidity due to decrease in rehypothecation, reduced securities lending, and hoarding of cash by major banks is at least $5 trillion. In order to mitigate counterparty risk, there have been regulatory initiatives to establish central counterparties (CCPs). From a policy perspective, counterparty risk remains large at present and recent experience has shown that OTC derivative positions are not supported by sufficient capital, constituting a major risk for participants in this market.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/173.

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Length: 15 pages
Date of creation: 12 Aug 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/173

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Related research
Keywords: Banking sector ; Bankruptcy ; Banks ; Bonds ; Capital markets ; Financial institutions ; Financial instruments ; Financial risk ; Nonbank financial sector ; Securities markets ;

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  1. Peter Hördahl & Michael R King, 2008. "Developments in repo markets during the financial turmoil," BIS Quarterly Review, Bank for International Settlements, December. [Downloadable!]
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This page was last updated on 2009-12-17.

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