Template-Type: ReDIF-Paper 1.0
Author-Name: Sirio Aramonte
Author-X-Name-First: Sirio
Author-X-Name-Last: Aramonte
Author-Name: Andreas Schrimpf
Author-X-Name-First: Andreas
Author-X-Name-Last: Schrimpf
Author-Name: Hyun Song Shin
Author-X-Name-First: Hyun Song
Author-X-Name-Last: Shin
Title: Margins, debt capacity, and systemic risk
Abstract: Debt capacity depends on margins. When set in a financial system context with collateralized borrowing, two additional features emerge. The first is the recursive property of leverage whereby higher leverage by one player begets higher leverage overall, reflecting the nature of debt as collateral for others. The second feature is that the "dash for cash" is the mirror image of deleveraging. In any setting where market participants engage in margin budgeting, a generalized increase in margins entails a shift of the overall portfolio away from riskier to safer assets. These findings have important implications for the design of non-bank financial intermediary (NBFI) regulations and of central bank backstops.
Creation-Date: 2023-09
File-URL: https://www.bis.org/publ/work1121.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1121.htm
File-Format: text/html
Number: 1121
Keywords: financial intermediation, non-banks, market-based finance, market liquidity, systemic risk
Classification-JEL: G22, G23, G28
Handle: RePEc:bis:biswps:1121