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This article analyzes the impact of the introduction of centrally cleared credit risk transfer on a loan originating bank's lending discipline in the primary loan market. Under Basel III, a bank can transfer credit risk via central clearing at favorable regulatory conditions. Central clearing, however, reduces the lending discipline because the fact that only standardized contracts can be centrally cleared allows the originating bank to profitably grant and hedge a low quality loan. The impact on the lending discipline crucially depends on the regulatory design of central clearing such as capital requirements, disclosure standards, risk retention, and access to uncleared credit risk transfer. I also show that the lending discipline is an important determinant of the impact of central clearing on system risk

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  • Arnold, Marc

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  • Arnold, Marc, 2013. "This article analyzes the impact of the introduction of centrally cleared credit risk transfer on a loan originating bank's lending discipline in the primary loan market. Under Basel III, a bank can t," Working Papers on Finance 1321, University of St. Gallen, School of Finance, revised Dec 2014.
    • Handle: RePEc:usg:sfwpfi:2013:21
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1321.pdf
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    More about this item

    Keywords

    Credit Risk Transfer; Central Clearing; Lending Discipline; Systemic Risk;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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