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The economics of collateral

Anderson, Ronald W. and Jõeveer, Karin (2014) The economics of collateral. SRC Discussion Paper (No 12). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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In this paper we study how the use of collateral is evolving under the influence of regulatory reform and changing market structure. We start with a critical review of the recent empirical literature on the supply and demand of collateral which has focussed on the issue of ‘collateral scarcity’. We argue that while limited data availability does not allow a comprehensive view of the market for collateral, it is unlikely that there is an overall shortage of collateral. However, it is quite possible that there may be bottlenecks within the system which mean that available collateral is immobilized in one part of the system and unattainable by credit-worthy borrowers. We then describe how these problems sometimes can be overcome by improved information systems and collateral transformation. We discuss how collateral management techniques differ between banks and derivatives markets infrastructures including, in particular, CCPs. In order to assess the impact of alternative institutional arrangements on collateral demand, we introduce a theoretical model of an OTC derivatives market consisting of investors and banks arrayed in several regions or market segments. We simulate this model under alternative forms meant to capture the implications of moving to mandatory CCP clearing and mandatory initial margin requirements for non-cleared OTC derivatives.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © Ronald W. Anderson, Karin Jõeveer submitted 2014
Divisions: Finance
Systemic Risk Centre
Subjects: H Social Sciences > HB Economic Theory
Date Deposited: 29 Aug 2014 11:19
Last Modified: 31 Dec 2020 00:40
Projects: ES/K002309/1
Funders: Economic and Social Research Council

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