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Systemic risk in clearing houses: Evidence from the European repo market

Charles Boissel, François Derrien, Evren Ors and David Thesmar

Journal of Financial Economics, 2017, vol. 125, issue 3, 511-536

Abstract: We study how crises affect Central Clearing Counterparties (CCPs). We focus on a large and safe segment of the CCP-cleared repo market during the Eurozone sovereign debt crisis. We develop a simple model to infer CCP stress, which is measured as repo rates’ sensitivity to sovereign credit default swaps (CDS) spreads and jointly captures (1) the effectiveness of haircut policies, (2) CCP-member default risk (conditional on sovereign default), and (3) CCP default risk (conditional on both sovereign and CCP-member default). During 2011, repo rates strongly respond to sovereign risk, particularly for Greece, Italy, Ireland, Portugal and Spain (GIIPS): Repo investors behaved as if the conditional probability of CCP default was substantial.

Keywords: Repurchase agreement; Sovereign debt crisis; LTRO; Secured money market lending; Clearing houses (search for similar items in EconPapers)
JEL-codes: E58 E43 G01 G21 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Systemic risk in clearing houses: Evidence from the European repo market (2016) Downloads
Working Paper: Systemic Risk in Clearing Houses: Evidence from the European Repo Market (2015) Downloads
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Handle: RePEc:eee:jfinec:v:125:y:2017:i:3:p:511-536