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Model risk at central counterparties: Is skin-in-the-game a game changer?

Wenqian Huang and Elod Takats

No 866, BIS Working Papers from Bank for International Settlements

Abstract: We investigate empirically how the balance sheet characteristics of central counterparties (CCPs) affect their modelling of credit risk. CCPs set initial margin (IM), i.e., the collateral for transactions, to limit counterparty credit risk. When a CCP's IM model fails on a large scale, the CCP could fail too, losing its skin-in-the-game capital. We find that higher skin-in-the-game is significantly a ssociated with more p rudent modelling, in contrast to profits (a proxy for franchise value) and forms of capital other than skin-in-the-game. The results may help to inform the ongoing policy debate on how to incentivise prudent credit risk management at CCPs.

Keywords: central counterparties (CCPs); capital; risk-taking (search for similar items in EconPapers)
JEL-codes: F34 F42 G21 G38 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2020-05
New Economics Papers: this item is included in nep-ban and nep-rmg
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