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Margins, debt capacity, and systemic risk

Author

Listed:
  • Sirio Aramonte
  • Andreas Schrimpf
  • Hyun Song Shin

Abstract

Debt capacity depends on margins. When set in a financial system context with collateralized borrowing, two additional features emerge. The first is the recursive property of leverage whereby higher leverage by one player begets higher leverage overall, reflecting the nature of debt as collateral for others. The second feature is that the "dash for cash" is the mirror image of deleveraging. In any setting where market participants engage in margin budgeting, a generalized increase in margins entails a shift of the overall portfolio away from riskier to safer assets. These findings have important implications for the design of non-bank financial intermediary (NBFI) regulations and of central bank backstops.

Suggested Citation

  • Sirio Aramonte & Andreas Schrimpf & Hyun Song Shin, 2023. "Margins, debt capacity, and systemic risk," BIS Working Papers 1121, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1121
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    References listed on IDEAS

    as
    1. Andreas Schrimpf & Hyun Song Shin & Vladyslav Sushko, 2020. "Leverage and margin spirals in fixed income markets during the Covid-19 crisis," BIS Bulletins 2, Bank for International Settlements.
    2. Vissing-Jorgensen, Annette, 2021. "The Treasury Market in Spring 2020 and the Response of the Federal Reserve," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 19-47.
    3. Shin, Hyun Song, 2008. "Risk and liquidity in a system context," Journal of Financial Intermediation, Elsevier, vol. 17(3), pages 315-329, July.
    4. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
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    Cited by:

    1. Iñaki Aldasoro & Fernando Avalos & Wenqian Huang, 2023. "Liquid assets at CCPs and systemic liquidity risks," BIS Quarterly Review, Bank for International Settlements, December.

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    More about this item

    Keywords

    financial intermediation; non-banks; market-based finance; market liquidity; systemic risk;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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