Risk transfer without tears
While collateralisation has become an important element in credit risk management, firms need to be aware of the inherent risks of its widespread use. By Tim Davies
As a concept, collateralisation is not new. Indeed, Shakespeare, in The Merchant of Venice, clearly highlighted some of the issues associated with the extraction of value from a collateralisation relationship.
Today, collateralisation is often regarded as a ‘risk-free’ risk mitigant, a view that can give a false sense of security, especially within a trading environment. This is made clear by the UK Financial Services Authority April 2004 paper, Management of credit risks within a trading
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