Template-Type: ReDIF-Paper 1.0
Author-Name: Wenqian Huang
Author-X-Name-First: Wenqian
Author-X-Name-Last: Huang
Author-Name: Előd Takáts
Author-X-Name-First: Előd
Author-X-Name-Last: Takáts
Title: Model risk at central counterparties: Is skin-in-the-game a game changer?
Abstract: We investigate empirically how the balance sheet characteristics of central counterparties (CCPs) affect their modelling of credit risk. CCPs set initial margin (IM), i.e., the collateral for transactions, to limit counterparty credit risk. When a CCP's IM model fails on a large scale, the CCP could fail too, losing its skin-in-the-game capital. We find that higher skin-in-the-game is significantly a ssociated with more p rudent modelling, in contrast to profits (a proxy for franchise value) and forms of capital other than skin-in-the-game. The results may help to inform the ongoing policy debate on how to incentivise prudent credit risk management at CCPs.
Length: 28 pages
Creation-Date: 2020-05
File-URL: https://www.bis.org/publ/work866.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work866.htm
File-Format: text/html
Number: 866
Classification-JEL: F34, F42, G21, G38
Keywords: central counterparties (CCPs), capital, risk-taking
Handle: RePEc:bis:biswps:866