The unintended impact of collateral on financial stability
Initial margin requirements for OTC derivatives can increase risk of contagion, writes economist
To mitigate financial stability risks, policy-makers and regulators should be able to measure and analyse contagion – that is, the spread of losses and defaults through the financial system. I have been working on this problem with Paul Glasserman at Columbia Business School and Peyton Young at the London School of Economics. We recently developed a network model to study the impact of margin requirements and stay rules in bankruptcy and resolution regimes in over-the-counter derivatives on
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