One-way collateral agreements with sovereign leave banks exposed
If regulators are serious about tackling liquidity risk, they should tell sovereigns to start posting collateral on their derivatives trades, dealers argue – the current one-way agreements leave banks with tens of billions of dollars in volatile funding obligations.
Without state support, the banking industry would be in ruins – crushed by its own funding needs and a lack of liquidity. But attempts to buttress the system have yet to touch upon the extraordinary privileges enjoyed by state actors in the derivatives market, which leave their counterparties with funding costs worth tens of billions of dollars across the top-tier dealers – an ongoing source of stress and a potential flashpoint in any future crisis.
The issue is all about collateral – more
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