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Collateral Composition, Diversification Risk, and Systemically Important Merchant Banks

Author

Listed:
  • Alexis Derviz
Abstract
We study the impact of collateral diversification by non-financial firms on systemic risk in a general equilibrium model with standard production functions and mixed debt-equity financing. Systemic risk comes about as soon as firms diversify their collateral by holding claims on a big wholesale bank (called merchant bank in the paper) whose asset side includes claims on the same producer set. The merchant bank sector proves to be fragile (has a short distance to default) regardless of competition. In this setting, the policy response, consisting in official guarantees for the merchant bank's liabilities, entails considerable government loss risk. An alternative without the need for public sector involvement is to encourage systemically important merchant banks to introduce a simple bail-in mechanism by restricting their liabilities to contingent convertible bonds. This line of regulatory policy is particularly relevant to the containment of systemic events in globally leveraged economies serviced by big international banks outside host country regulatory control.

Suggested Citation

  • Alexis Derviz, 2013. "Collateral Composition, Diversification Risk, and Systemically Important Merchant Banks," Working Papers 2013/11, Czech National Bank.
    • Handle: RePEc:cnb:wpaper:2013/11
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    References listed on IDEAS

    as
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    Citations

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    as


    Cited by:

    1. Alexis Derviz, 2016. "Credit Constraints and Creditless Recoveries: An Unsteady State Approach," Working Papers 2016/10, Czech National Bank.
    2. repec:cnb:ocpubv:rb12/2 is not listed on IDEAS
    3. repec:cnb:ocpubc:fsr1415/5 is not listed on IDEAS
    4. repec:cnb:ocpubv:rb13/1 is not listed on IDEAS
    5. repec:cnb:ocpubv:rb13/2 is not listed on IDEAS
    6. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.
    7. repec:cnb:ocpubv:rb14/2 is not listed on IDEAS
    8. repec:cnb:ocpubv:rb12/1 is not listed on IDEAS
    9. Philippe Oster, 2020. "Contingent Convertible bond literature review: making everything and nothing possible?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 343-381, December.

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    More about this item

    Keywords

    CoCos; collateral; merchant bank; systemic risk;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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