Regulation has introduced a new element of systemic risk in the collateral markets centered on non-bank institutions. Since 2008, financial regulators have used mandatory collateral buffers to increase systemic stability and immunize against counterparty defaults. The OTC derivatives marketplace has been a particular focus with collateralization for both bilateral and cleared trades.
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Isn’t the answer then to give more access to central bank operations across the board ? Secured funding markets are set to grow through a combination of regulation and a general move away from unsecured lending. Given stated aims to make the marketplace a safer, more open, fairer and transparent environment, central bankers should welcome an expanded and diverse repo counterparty base which is not concentrated in half a dozen banks who no longer wish to be the conduits through whom the market sources its liquidity in times of stress ( and if it involves using balance sheet at other times too ).
Absolut, collateralization is a necessity and the collateral market will benefit significantly, if we continue to establish a regime, which ensures a level playing fields for all market participants. Nevertheless as of today, the missing link to absorb collateral shocks and avoid knock-on effects might be a reliable emergency access to short-term collateral liquidity open for all market participants. If one centralized service or multiple concurrent services are doing best and if national central banks, BIS, CCPs or private market consortiums shall be involved might be different questions. I am convinced that, if we take this subject serious, we will find a market solution beyond internal risk-control mechanism.