Featured Product

    BIS on Nexus Between Banks and Central Counterparties Amid Pandemic

    May 11, 2020

    BIS published a bulletin that examines the nexus between banks and central counterparties (CCPs) amid the COVID-19 pandemic. The bulletin highlights that when thinking about margining, central banks need to assess banks and CCPs jointly rather than in isolation. In the CCP-bank nexus, actions that seem prudent from the perspective of an individual institution have the potential to strain the stability of the entire nexus through interactions. For instance, increasing margin during market stress does address increased counterparty risk. However, it can put undue pressure on clearing member banks at the wrong time.

    The COVID-19 pandemic led to market turmoil in mid-March. CCPs remained resilient, vindicating the post-crisis reforms that incentivized central clearing. The procyclicality of leverage embedded in margining models might have played a role in the events of mid-March. These margin models are critical because they underpin the management of counterparty credit risk. Margin models of some CCPs seem to have underestimated market volatility, in part because they have relied on a short period of historical price movements from tranquil times. These CCPs had to catch up and increase margins at the wrong time, squeezing liquidity when it was most needed. Going forward, the interaction of CCPs with clearing member banks is critical. Importantly, actions that might seem prudent from an individual institution’s perspective, such as increasing margins in a turmoil, might destabilize the nexus overall. Therefore, central banks and regulators need to assess banks and CCPs jointly rather than in isolation.

     

    Related Links

    Keywords: International, Banking, COVID-19, Initial Margin, Variation Margin, Procyclicality, Liquidity Risk, Counterparty Credit Risk, BIS

    Featured Experts
    Related Articles
    News

    EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models

    The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.

    June 21, 2022 WebPage Regulatory News
    News

    EP Reaches Agreement on Corporate Sustainability Reporting Directive

    The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).

    June 21, 2022 WebPage Regulatory News
    News

    PRA Consults on Model Risk Management Principles for Banks

    The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.

    June 21, 2022 WebPage Regulatory News
    News

    EC Regulation Amends Standards for Calculating Credit Risk Adjustments

    The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.

    June 21, 2022 WebPage Regulatory News
    News

    BIS Hub Updates Work Program for 2022, Announces New Projects

    The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.

    June 17, 2022 WebPage Regulatory News
    News

    EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance

    The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.

    June 17, 2022 WebPage Regulatory News
    News

    US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule

    Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)

    June 16, 2022 WebPage Regulatory News
    News

    EIOPA Consults on Review of Securitization Framework in Solvency II

    The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.

    June 16, 2022 WebPage Regulatory News
    News

    UK Authorities Issue Regulatory and Reporting Updates for Banks

    The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.

    June 15, 2022 WebPage Regulatory News
    News

    BCBS Issues Climate Risk Principles while HKMA Expresses Its Support

    The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.

    June 15, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8280