Institute of Information Theory and Automation

Publication details

Collateral Composition, Diversification Risk, and Systemically Important Merchant Banks

Journal Article

Derviz Alexis


serial: Journal of Financial Stability vol.14, p. 23-34

project(s): GA13-11983S, GA ČR

keywords: collateral, systemic risk, merchant bank, CoCo

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abstract (eng):

The impact of collateral diversification by non-financial firms on systemic risk is studied 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 (merchant) bank 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.

RIV: AH

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Last modification: 21.12.2012
Institute of Information Theory and Automation