Working Paper: CEPR ID: DP18570
Authors: Sirio Aramonte; Andreas Schrimpf; Hyun Song Shin
Abstract: Debt capacity depends on margins. When set in a financial system context with collateralized borrowing, two additional features emerge. The first is the recursive property of leverage whereby higher leverage by one player begets higher leverage overall, reflecting the nature of debt as collateral for others. The second feature is that the “dash for cash” is the mirror image of deleveraging. In any setting where market participants engage in margin budgeting, a generalized increase in margins entails a shift of the overall portfolio away from riskier to safer assets. These findings have important implications for the design of non-bank financial intermediary (NBFI) regulations and of central bank backstops.
Keywords: financial intermediation; nonbanks; market-based finance; market liquidity; systemic risk
JEL Codes: G22; G23; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debt capacity of one investor (G51) | Debt capacity of other investors (G32) |
| Increase in margins (D43) | Shift from riskier to safer assets (G11) |
| Debt capacity of other investors (G32) | Debt capacity of one investor (G51) |
| Increase in margins (D43) | Deleveraging (G33) |
| Deleveraging (G33) | Dash for cash (Y60) |
| Increase in margins (D43) | Dash for cash (Y60) |