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    BIS Publishes Several Working Papers in December 2019

    December 20, 2019

    BIS published working papers on varied topics during December 2019. The papers address issues such as central counterparty (CCP) exposure in stressed markets, cost of clearing fragmentation, macroeconomic effects of the macro-prudential policy, impact of local foreign-exchange interventions on the global financial cycle on credit, and bank loan supply during crisis. Also published was a working paper that explores linkages between the BIS International Banking Statistics (IBS), the IMF International Investment Position (IIP) and Coordinated Portfolio Investment Survey (CPIS) statistics, and the BIS International Debt Securities (IDS) statistics.

    Using mirror data to track international banking. This working paper, which is published by the Irving Fisher Committee of BIS, highlights that recent enhancements to the BIS international banking statistics have led to improvements in data quality and coverage, with more information available about the instrument type, counterparty country by bank nationality, and counterparty sector of banks' international positions. The study uses mirror data techniques to examine the data elements that are common both within the various international banking datasets and between these datasets and other external financial statistics. Along the way, it offers guidance on the types of reporting errors that should be avoided. The methodologies developed for consistency could be applied to individual reporting countries as well as to bilateral comparisons among reporting countries (for example, debtor versus creditor) at a granular level. The paper also provides a road map for users to enhance their analyses using mirror data concepts. The paper highlights that the success of mirror data initiatives will require coordination across data reporting central banks, statistical agencies, and international organizations (such as BIS, IMF, OECD, World Bank). For its part, the IFC is actively seeking to promote data sharing among its members.

    Central counterparty exposure in stressed markets. The study tracks and breaks down changes in CCP exposure into price- and position-related factors, also examining how these factors interact under stressed market conditions—that is, when CCP exposure is at a high level or undergoes a large and abrupt increase. The study finds that the drivers of a CCP's overall exposure in stressed markets are fundamentally different from those in normal times. The paper proposes a new way of monitoring the risk exposure of a CCP toward its clearing members. The paper contributes to a rapidly expanding literature on central clearing by proposing an approach to monitoring CCP exposure intra-daily. This approach is particularly useful in stressed markets, when trading is fast-paced and data come in rapidly. The approach copes with such "big data" challenges and, in particular, sheds light on how the commonality of exposures across clearing members increases a CCP's overall exposure in stressed markets.

    The cost of clearing fragmentation. This paper studies the costs associated with clearing fragmentation as central clearing of over-the-counter derivatives contracts becomes more common. The study uses proprietary data to document and analyze an economically significant CCP basis for dollar swap contracts cleared at the Chicago Mercantile Exchange (CME) and the London Clearing House (LCH). The study finds that the average CCP basis for dollar swap contracts was nearly 2 basis points during the sample period. This is economically significant as it translates into a daily opportunity cost of about USD 80 million for end users. The CCP basis allows dealers to recoup increased collateral costs when clearing is fragmented. In those cases, dealers, who provide liquidity globally, cannot net their offsetting trades across CCPs. This increases their collateral costs. They pass these costs on to end users through the CCP basis. That is, dealers quote a higher price at a CCP where buyers prevail and a lower price when sellers prevail. The analysis shows that the CCP basis increases in the amount of dealers' posted collateral pledged with the CCP (that is, the initial margin), dealers' credit spread and debt overhang costs, and the order-flow imbalance in one CCP. The basis decreases in the volume share of sophisticated traders with access to both CCPs who can, therefore, clear where prices are more advantageous.

    Macroeconomic effects of the macro-prudential policy. Recent years have seen an increasing use of macro-prudential policy to mitigate systemic risk. In addition to the effects on financial stability, theoretical models suggest various channels through which macro-prudential policy could have broader macroeconomic effects on economic activity, consumption and investment. But empirical evidence on such macroeconomic effects remains sparse, in particular in a framework that would incorporate both monetary and macro-prudential policy. The study in this paper provides empirical evidence about the broader macroeconomic effects of macro-prudential policy and the underlying transmission mechanism as well as about the response of macro-prudential policy to credit shocks. The study finds that macro-prudential policy shocks have effects on real GDP, the price level, and credit that are very similar to those of monetary policy shocks, but the detailed transmission of the two policies is different.

    Hedger of last resort. There is a large literature exploring the lending channel in emerging market economies and its dependence on global financial conditions. However, that literature does not evaluate how local unconventional policies, such as foreign-exchange interventions, can attenuate the effects of the global financial cycle on local credit markets. The study presented in this paper uses micro-data from Brazil and focuses on a different form of intervention using foreign-exchange derivatives. The study finds a potent channel that directly affects domestic banks, with related effects on firms' credit intake and labor demand. Banks with larger foreign debt responded to U.S. dollar appreciation, increased foreign-exchange volatility, and tighter U.S. monetary policy by decreasing credit supply. Foreign-exchange interventions mitigated these effects of the global financial cycle on credit, confirming that policies promoting the supply of hedging instruments are effective in decreasing the local economy exposure to global conditions.

    Bank loan supply during crisis. The authors use detailed loan-level data on worldwide syndicated lending to investigate how geographic diversification affects banks' loan supply during banking crises in their host countries. The results show that diversified banks maintain higher loan supply during banking crises in borrower countries. The positive loan supply effects lead to higher investment and employment growth for firms. Diversified banks have a stabilizing effect, thanks to their ability to raise additional funding during times of distress, which also shields connected markets from spillovers. Further distinguishing banks by nationality reveals a pecking order: diversified domestic banks are the most stable source of funding, while foreign banks with little diversification are the most fickle. The findings suggest that the decline in financial integration since the recent crisis increases countries' vulnerability to local shocks.


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    Keywords: International, Banking, Credit Risk, Reporting, Big Data, CCP Exposures, Macro-prudential Policy, Research, IFC, BIS

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