Economics, Econometrics and Finance
7 years ago

Counterparty Credit Limits Could Destabilize Prices and Increase Systemic Risk.

arXiv (Cornell University)
Counterparty Credit Limits: An Effective Tool for Mitigating Counterparty Risk?
Martin Gould, Nikolaus Hautsch, Sam Howison, Mason A. Porter

Paper Summary

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Counterparty credit limits (CCLs) are used by financial institutions to control their risk from dealing with specific parties. While CCLs are meant to reduce risk, they can limit access to funds. Research shows that CCLs have little effect on trade prices in normal situations. However, in extreme cases, CCLs could lead to price instability and increase overall risk.