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Always look on the bright side? Central counterparties and interbank markets during the financial crisis

Massimiliano Affinito () and Matteo Piazza ()
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Massimiliano Affinito: Bank of Italy
Matteo Piazza: Bank of Italy

No 1181, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper joins the debate on the growing use of CCPs in interbank markets by analysing a scarcely explored source of risk. Namely, that central clearing may provide riskier banks that are cut off from the bilateral segment with another means of accessing the interbank market, thereby eluding market discipline and potentially increasing the risks borne by the financial system. We investigate this issue using monthly granular data on Italian banks from January 2004 to June 2013, and find that during the global financial crisis riskier banks increased the share of their interbank funding obtained via CCPs due to both the impact of general market uncertainty and heightened attention to counterparty risk in the bilateral segment of the market. More tellingly, we show that, for riskier banks only, this increase was accompanied by a decline in the duration of bilateral relationships, indicating that longer-standing counterparts, typically the most informed ones, withdrew from these relationships. This suggests that, compared with banks operating in the bilateral segment, on average banks working with CCPs may be riskier, confirming the importance of ongoing efforts to ensure that CCPs have a proper risk management framework.

Keywords: CCPs; central clearing; central counterparties; financial crisis; interbank markets; networks; interbank lending relationships (search for similar items in EconPapers)
JEL-codes: E58 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-rmg
Date: 2018-07
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