Basel Committee looks at the role of valuation and leverage in procyclicality
BASEL - The Basel Committee on Banking Supervision's Committee on the Global Financial System has published a report entitled 'The role of valuation and leverage in procyclicality'.
The report explores the link between leverage and valuation in the light of the recent market stress. It highlights that market practices related to market-sensitive valuation techniques have contributed to an increase in procyclicality of leverage in the financial system.
It considers several market practices, such as strongly procyclical haircuts on financing transactions and initial margins on OTC derivatives, that add liquidity to the market in a boom and drain it in times of stress, and sets out a number of policy options that could be considered to mitigate these procyclical mechanisms.
Click here for a copy of the report.
More on Foreign Exchange
Target redemption forwards declining in popularity for macro reasons
EC ‘forgets’ to mention sterling in letter defining forex contracts
Target redemption forwards with capped loss structure set for launch
CNT fixing will be a boon for Taiwan’s derivatives market
Sign up for Risk.net email alerts
Oxford professor David Vines argues that the carrot is as important as the stick
Sponsored webinar: IBM
Watch highlights of this year's London conference
Operational risk and the challenges of defining and dealing with conduct risk
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.