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Margins, debt capacity, and systemic risk

Sirio Aramonte, Andreas Schrimpf and Hyun Song Shin

No 1121, BIS Working Papers from Bank for International Settlements

Abstract: Debt capacity depends on margins. When set in a financial system context with collateralized borrowing, two additional features emerge. The first is the recursive property of leverage whereby higher leverage by one player begets higher leverage overall, reflecting the nature of debt as collateral for others. The second feature is that the "dash for cash" is the mirror image of deleveraging. In any setting where market participants engage in margin budgeting, a generalized increase in margins entails a shift of the overall portfolio away from riskier to safer assets. These findings have important implications for the design of non-bank financial intermediary (NBFI) regulations and of central bank backstops.

Keywords: financial intermediation; non-banks; market-based finance; market liquidity; systemic risk (search for similar items in EconPapers)
JEL-codes: G22 G23 G28 (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-fmk, nep-ger and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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