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Central Clearing and Systemic Liquidity Risk

Thomas King, Travis Nesmith, Anna Paulson and Todd Prono
Additional contact information
Anna Paulson: Federal Reserve Bank of Chicago
Todd Prono: Board of Governors of the Federal Reserve System

International Journal of Central Banking, 2023, vol. 19, issue 4, 85-142

Abstract: By stepping between bilateral counterparties, central counterparties (CCPs) transform credit exposure, thereby improving financial stability. But large CCPs are concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they require participants to provide cash. Such requirements increase with market volatility; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCPs’ resilience in the rare event that one or more large financial institutions default. Liquidityfocused macroprudential stress tests could help to assess and manage this systemic liquidity risk.

JEL-codes: E58 G21 G23 G28 N22 (search for similar items in EconPapers)
Date: 2023
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Related works:
Working Paper: Central Clearing and Systemic Liquidity Risk (2022) Downloads
Working Paper: Central Clearing and Systemic Liquidity Risk (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2023:q:4:a:3

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International Journal of Central Banking is currently edited by Loretta J. Mester

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