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Counterparty risk

Author

Listed:
  • Christian Ewerhart

    (University of Zurich - Institute for Empirical Research in Economics (IEW))

  • Jens Tapking

    (European Central Bank (ECB))

Abstract

A standard repurchase agreement between two counterparties is considered to examine the endogenous choice of collateral, the feasibility of secured lending, and welfare implications of the central bank’s collateral framework. As an innovation, we allow for two-sided counterparty risk. In line with empirical observations, it is shown that the most liquid and least risky assets are used as collateral in market transactions first. An endogenous opportunity cost arises from using liquid collateral with the central bank. Conditions are identified such that expected utility increases for all market participants when the central bank accepts a broader range

Suggested Citation

  • Christian Ewerhart & Jens Tapking, 2008. "Counterparty risk," Swiss Finance Institute Research Paper Series 08-24, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0824
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    More about this item

    Keywords

    Counterparty risk; repurchase agreements; collateral; liquidity; haircuts;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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