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Counterparty Risk, Impacton Collateral Flows and Role for Central Counterparties

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  • 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.

Suggested Citation

  • James Aitken & Manmohan Singh, 2009. "Counterparty Risk, Impacton Collateral Flows and Role for Central Counterparties," IMF Working Papers 09/173, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:09/173
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=23171
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    References listed on IDEAS

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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.
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    Cited by:

    1. Yannick Armenti & Stéphane Crépey, 2017. "Central Clearing Valuation Adjustment," Working Papers hal-01169169, HAL.
    2. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    3. Stefano Giglio, 2011. "Credit default swap spreads and systemic financial risk," Proceedings 1122, Federal Reserve Bank of Chicago.
    4. Yannick Armenti & St'ephane Cr'epey, 2015. "Central Clearing Valuation Adjustment," Papers 1506.08595, arXiv.org, revised Feb 2017.

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