The Impact of Sovereign Credit Risk on Bank Funding Conditions

Report Submitted by a Study Group established by the Committee on the Global Financial System. This Study Group was chaired by Fabio Panetta of the Bank of Italy

The US treasury market in August 1998: untangling the effects of Hong Kong and Russia with high-frequency data

The second half of August 1998 was dominated by two events. From 14 to 28 August, the Hong Kong Monetary Authority (HKMA) intervened in the Hong Kong equity markets to prevent a speculative double play against their currency board. On 17 August, Russia announced its default on sovereign bonds. This paper demonstrates that the HKMA interventions had a substantial impact on the outcomes for US Treasury markets during this period. Using a careful analysis of high frequency bond market data, both events are shown to intersect the US Treasury market, despite having oroginated from seemingly unrelated shocks. On this eveidence, the shocks emanating from Hong Kong were important for the US Treasury market. The lesson for policy makers is that major markets play an important role in transmitting and absorbing the effects of unrelated shocks.ESRC Research Programme on World Economy & Financ

CCPs and network stability in OTC derivatives markets

Among the reforms to OTC derivative markets since the global financial crisis is a commitment to collateralize counterparty exposures and to clear standardized contracts via central counterparties (CCPs). The reforms aim to reduce interconnectedness and improve counterparty risk management in these important markets. At the same time, however, the reforms necessarily concentrate risk in one or a few nodes in the financial network and also increase institutions’ demand for high-quality assets to meet collateral requirements. This paper looks more closely at the implications of increased CCP clearing for both the topology and stability of the financial network. Building on Heath et al. (2013) and Markose (2012), the analysis supports the view that the concentration of risk in CCPs could generate instability if not appropriately managed. Nevertheless, maintaining CCP prefunded financial resources in accordance with international standards and dispersing any unfunded losses widely through the system can limit the potential for a CCP to transmit stress even in very extreme market conditions. The analysis uses the Bank for International Settlements Macroeconomic Assessment Group on Derivatives (MAGD) data set on the derivatives positions of the 41 largest bank participants in global OTC derivative markets in 2012