Collateral Markets and Financial Plumbing (3rd Edition)
First published:
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Annex: Chapter 2
Annex: Chapter 2
Foreword
Introduction
Collateral in Financial Plumbing
Collateral Velocity
Leverage in the Financial System
Quantitative Easing and the IS/LM Framework
Money, Collateral and Safe Assets
“Reverse” Monetary Policy Transmission
Central Bank Balance Sheet Policies and Emerging Markets
The Collateral Custodians
The Changing Collateral Space
Collateral in the OTC Derivatives Market
CCP Resolution Remains Unresolved
The Sovereign–Bank Nexus via OTC Derivatives
Privacy Provision, Payment Latency and the Role of Collateral
Conclusion
Annex: Chapter 2
Annex: Chapter 7
LEVERAGING/DELEVERAGING COMPONENTS – BALANCE SHEET AND INTERCONNECTEDNESS
The purpose of this annex is to provide a mathematical framework developed by Hyun S. Shin (2009). In summary, this shows how the unwinding of systemic leverage (or deleveraging) can be separated into two components: balance-sheet shrinking (due to haircuts/ shedding of assets) and reduced interconnectedness within the financial system (due to shorter collateral chains).
xi = market value of bank i’s total liabilities
yi = market value of bank i’s assets that can be pledged as collateral
ei = market value of bank i’s equity
ai = market value of bank i’s assets
πji = proportion of j’s liabilities held by i, and j are nonbank j’s funding to bank i
is the ratio of debt to total assets
Noting that the total assets of bank i are given by
and from a simple accounting identity, it follows that the total debt can be computed by multiplying the totals assets with the leverage ratio:
Let x = [x1 … xn], y = [y1 … yn], and ∆
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