Journal of Financial Market Infrastructures

Risk.net

A map of collateral uses and flows

Dror Y. Kenett, Richard Bookstaber, Andrea Aguiar and Thomas Wipf

  • A map of collateral flows in the financial system is presented.
  • The collateral map allows us to understand the sources of collateral and how collateral moves through the financial system.
  • The map can also be used to detect areas of increased volume and speed of flows.

ABSTRACT

All flows of secured funding in the financial system are met by flows of collateral in the opposite direction. A network depicting secured funding flows thus implicitly reveals a network of collateral flows. Collateral can also be presented as its own network to show collateral arrangements with bilateral counterparties, triparty banks and central counterparties; the purpose and incentives of collateral exchanges; and the participants involved. We create a collateral map to show how this function of the financial system works, especially with secured funding and derivatives activity. This paper provides insights into the increased demand for collateral, the reduced capacity for banks to act as collateral intermediaries and examples of risks and vulnerabilities in collateral flows.

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