The Collateral Costs of Clearing

Abstract

The Collateral Costs of ClearingWe study three generic clearing arrangements in the presence of two-sided limited commitment: simple bilateral clearing, segregated collateral clearing through a third party, and-most sophisticated-central counterparty (CCP) clearing. Clearing secures the settlement of obligations from overthe-counter forward contracts that smooth the income of risk-averse traders. Clearing requires collateral to guarantee settlement; this is costly, as it reduces income from investment. More sophisticated clearing arrangements require more collateral. As a result, the welfare gains of CCP clearing may be mostly due to segregation, while mutualization of losses could contribute little to welfare.

Three tales of central banking and financial supervision for the ecological transition

“…It has been suggested that post-GFC policies ushered in a new age of central banking (see, e.g., Goodhart, 2010), a shift that precludes a return to the pre-GFC framework (Monnet, 2021). To account for evolutions and new challenges-notably environmental ones-some argue for a need to abandon the dominance of monetary over fiscal policies, and to develop a coherent framework to address the decarbonization challenge.…”

“…Others hold that the relevant challenge is not to replay "an old debate about whether central banks should be independent, but rather to define this independence in new terms" (Monnet, 2021). Instead, focusing on the euro area, Monnet (2021) calls for the creation of a European Credit Council that would operate under the authority of the European Parliament.…”

“…The legitimacy of this stance is not obvious given the crucial role of other types of expertise, notably legal, in shaping the economy, policies, and capital allocation (e.g., Pistor, 2019). Some argue that central banks' powers must be partly reined in or at least seriously questioned (e.g., Dietsch et al, 2018), and their potential role in credit guidance (following the proposals of Monnet, 2021Monnet, , 2023 should occur within a "web of institutions, including public development banks, which take such decisions based on the formulation of political will" (Bolton et al, 2020a;Thiemann, 2023). 6 More broadly, some argue that ecological threats pose a normative challenge to societies: public policies and policy frameworks must anticipate retrospective ethical judgment of present choices, an endeavor that cannot be left to central banks or indeed economic expertise alone (Dupuy, 2022).…”

“…Notwithstanding these considerations, the past few years have seen the emergence of diverse and sometimes intense debates on the role of CBFS with regards to environmental issues. These debates may have been caused in part by the expectations and public discussions generated by the unprecedented actions taken by central banks since the 2008 Global Financial Crisis (Goodhart, 2010;Monnet, 2021). These have included, until recently, very low or even negative policy interest rates, a significant increase in the size of central banks' balance sheets through the purchase of public and private assets, and new types of interventions such as currency swap arrangements among central banks.…”