Warding Off Financial Market Failure: How to Avoid Squeezed Margins and Bad Haircuts
David Longworth
C.D. Howe Institute Backgrounder, 2010, issue 135
Abstract:
Regulators aiming to ward off the next financial market failure need to implement rules to smooth the boom-bust cycle in margin requirements and haircuts used in securities financing and derivative transactions, which seriously exacerbated the last financial crisis. In this study, the author argues that key elements in a system-wide regulatory framework should include rules to mitigate swings between loose terms for margins and haircuts in boom times, and tightened terms during busts. Longworth emphasizes “through-the-cycle” haircuts and initial margins, the potential use of add-ons to haircuts and margins by macroprudential authorities, and market practices that are less procyclical than they were before and during the crisis.
Keywords: Financial Services; global financial crisis; regulatory framework; capital and leverage requirements; liquidity requirements; rules on margins and haircuts; financial insturments; collateral; loan-to-value ratios (search for similar items in EconPapers)
JEL-codes: F30 F34 G01 O16 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (17)
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Persistent link: https://EconPapers.repec.org/RePEc:cdh:backgr:135
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