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Margining in derivatives markets and the stability of the banking sector

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  • Gibson, Rajna
  • Murawski, Carsten

Abstract

We investigate the effects of margining, a widely-used mechanism for attaching collateral to derivatives contracts, on derivatives trading volume, default risk, and on the welfare in the banking sector. First, we develop a stylized banking sector equilibrium model to develop some basic intuition of the effects of margining. We find that a margin requirement can be privately and socially sub-optimal. Subsequently, we extend this model into a dynamic simulation model that captures some of the essential characteristics of over-the-counter derivatives markets. Contrarily to the common belief that margining always reduces default risk, we find that there exist situations in which margining increases default risk, reduces aggregate derivatives’ trading volume, and has an ambiguous effect on welfare in the banking sector. The negative effects of margining are exacerbated during periods of market stress when margin rates are high and collateral is scarce. We also find that central counterparties only lift some of the inefficiencies caused by margining.

Suggested Citation

  • Gibson, Rajna & Murawski, Carsten, 2013. "Margining in derivatives markets and the stability of the banking sector," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1119-1132.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:4:p:1119-1132 DOI: 10.1016/j.jbankfin.2012.10.005
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    References listed on IDEAS

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    Cited by:

    1. Niinimäki, Juha-Pekka, 2015. "The optimal allocation of alternative collateral assets between different loans," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 22-41.
    2. Daskalaki, Charoula & Skiadopoulos, George, 2016. "The effects of margin changes on commodity futures markets," Journal of Financial Stability, Elsevier, pages 129-152.

    More about this item

    Keywords

    Derivative securities; Default risk; Collateral; Margining; Systemic risk;

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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