BoE researchers outline risk of collateral collapse
In stress periods, collateral chains could break, paper warns
Future bouts of market stress will cause demand for high-quality collateral to spike while simultaneously limiting its supply, pushing financial markets deeper into crisis, according to research by three Bank of England economists.
The research – to be published in the Journal of Financial Market Infrastructure in September – ties this pro-cyclical risk in part to incoming rules requiring collateralisation of non-cleared derivatives trades. The authors call for regulators to be careful when
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