CGFS releases report on collateral
6 March 2001
The BIS is releasing today a report entitled "Collateral in wholesale financial markets: recent trends, risk management and market dynamics". The report has been prepared by a Working Group of the Committee on the Global Financial System. The Group was asked to assess recent trends in the demand for and the supply of collateral, with a special emphasis on collateral's role in influencing market price dynamics and market liquidity.
The first chapter of the report deals with the main forces driving the demand for and supply of collateral to manage counterparty credit and liquidity risks in the wholesale financial markets. It summarises major trends in the private sector use of collateral and provides an overview of central bank collateral practices. The second chapter addresses the benefits and costs of the use of collateral, and the role of collateral practices in achieving the desired control of counterparty credit and liquidity risks. The third chapter looks at the impact that collateral practices have on the performance of financial markets under stress. It reviews the role of collateral in past episodes of market disturbance and analyses the ways in which collateral practices affect market dynamics.
The report concludes that the rapid growth of collateral usage relative to supply is likely to continue, but that markets have the capacity to adjust through pricing, generating new supply and using a broader range of assets as collateral. Under these circumstances, the transparent use of collateral and appropriate risk management practices are key prerequisites for fully exploiting the benefits of collateral as a risk mitigation technique.
The report is available on the BIS website at www.bis.org.
Notes to editors
The Committee on the Global Financial System is a central bank forum established by the Governors of the G10 central banks to monitor and examine broad issues relating to financial markets and systems, with a view to elaborating appropriate policy recommendations to support the central banks in the fulfilment of their monetary and financial stability responsibilities. In carrying out these tasks, the Committee places particular emphasis on assisting the Governors in recognising, analysing and responding to threats to the stability of financial markets and the global financial system.
The Working Group that prepared the report was chaired by Christine Cumming, Executive Vice President and Director of Research at the Federal Reserve Bank of New York. The Working Group's members are listed in the report.