Transparency and collateral: central versus bilateral clearing

Gaetano Antinolfi (), Francesca Carapella () and Francesco Carli
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Gaetano Antinolfi: Department of Economics, Washington University in St. Louis
Francesca Carapella: Payment System Studies, Board of Governors of the Federal Reserve

Theoretical Economics, 2022, vol. 17, issue 1

Abstract: This paper studies the optimal clearing arrangement for bilateral financial contracts in which an assessment of counterparty credit risk is crucial for efficiency. The economy is populated by borrowers and lenders. Borrowers are subject to limited commitment and hold private information about the severity of such lack of commitment. Lenders can acquire information, at a cost, about the commitment of their borrowers, which affects the assessment of counterparty risk. Clearing through a central counterparty (CCP) allows lenders to mutualize counterparty credit risk, but this insurance may weaken incentives to acquire and reveal information. If information acquisition is incentive-compatible, then lenders choose central clearing. If it is not, they may prefer bilateral clearing either to prevent strategic default or to optimize the allocation of costly collateral.

Keywords: Limited commitment; central counterparties; collateral (search for similar items in EconPapers)
JEL-codes: G10 G14 G20 G23 (search for similar items in EconPapers)
Date: 2022-01-20
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Transparency and Collateral: Central versus Bilateral Clearing (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:the:publsh:3893

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