This article analyzes the impact of the introduction of centrally cleared credit risk transfer on a loan originating bank's lending discipline in the primary loan market. Under Basel III, a bank can transfer credit risk via central clearing at favorable regulatory conditions. Central clearing, however, reduces the lending discipline because the fact that only standardized contracts can be centrally cleared allows the originating bank to profitably grant and hedge a low quality loan. The impact on the lending discipline crucially depends on the regulatory design of central clearing such as capital requirements, disclosure standards, risk retention, and access to uncleared credit risk transfer. I also show that the lending discipline is an important determinant of the impact of central clearing on system risk

Marc Arnold ()

No 1321, Working Papers on Finance from University of St. Gallen, School of Finance

Keywords: Credit Risk Transfer; Central Clearing; Lending Discipline; Systemic Risk (search for similar items in EconPapers)
JEL-codes: G18 G28 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2013-05, Revised 2014-12
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2013:21

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