During the Financial crisis of 2007-09, it has been observed that financial institutions were far more interconnected and dependent on each other than it was assumed by regulators. Institutions were connected through repo market, for funding need, OTC derivatives and other asset markets. Institutions posted collateral to counterparties to mitigate the credit risk of transactions in these markets. However During the crisis, rapidly falling asset values, corresponding collateral calls, and stricter collateral requirements led to large losses and subsequent funding needs among financial firms. The degree of interconnection between firms caused these effects to spread more broadly and rapidly than expected. The whole system was more fragile.
Now learning lesson from the crisis, FED required bank holding companies (BHCs) with more than $10 billion to start reporting their collateral arrangements in much greater detail.These data provide insight into counterparties and collateral arrangements in these markets.
“Although BHCs have large exposure to banks, most of the collateral involved maintains minimal credit risk and is highly liquid. Conversely, contracts with corporations tend to use more diverse types of collateral, but the volume of these contracts is only one-quarter that of contracts with other banks,” write Marius Rodriguez and Hamed Faquiryan of the Economic Research Department of the San Francisco Fed. “Moreover, the exposure to hedge fund counterparties is minimal and is collateralized by safe, liquid instruments.”
Now learning lesson from the crisis, FED required bank holding companies (BHCs) with more than $10 billion to start reporting their collateral arrangements in much greater detail.These data provide insight into counterparties and collateral arrangements in these markets.
“Although BHCs have large exposure to banks, most of the collateral involved maintains minimal credit risk and is highly liquid. Conversely, contracts with corporations tend to use more diverse types of collateral, but the volume of these contracts is only one-quarter that of contracts with other banks,” write Marius Rodriguez and Hamed Faquiryan of the Economic Research Department of the San Francisco Fed. “Moreover, the exposure to hedge fund counterparties is minimal and is collateralized by safe, liquid instruments.”
In the FED report it also has been observed that collateral posed by hedge funds not only managed actively but also posted collateral is more than total exposure. This type of information can play a important role in understanding the linkage of financial institutions and can be very helpful to keep a check on whole system.
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