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

16 Pages Posted: 19 Aug 2009

See all articles by Manmohan Singh

Manmohan Singh

International Monetary Fund (IMF)

James Aitken

affiliation not provided to SSRN

Date Written: August 2009

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.

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

Suggested Citation

Singh, Manmohan and Aitken, James, Counterparty Risk, Impact on Collateral Flows and Role for Central Counterparties (August 2009). IMF Working Paper No. 09/173, Available at SSRN: https://ssrn.com/abstract=1457596

Manmohan Singh

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

James Aitken

affiliation not provided to SSRN ( email )

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