RMASL30: collateral change
17 October 2013 Boca Raton
Image: Shutterstock
Good collateral has velocity and central banks cannot rely on institutions鈥� excess reserves to supply the market, said the a senior economist from the International Monetary Fund at the 30th Risk Management Association Conference on 麻豆传媒 Lending in Boca Raton, Florida.
Manmohan Singh was speaking as part of a panel discussion on the optimisation, scarcity, efficiency and eligibility of collateral.
鈥淗edge funds are the single largest suppliers of collateral,鈥� he said, followed by large banks, which act as custodians of large supplies, and then entities such as pension funds and insurers.
Hedge funds, he explained, had $1.8 trillion in pledged collateral at the end of 2012, up slightly from $1.7 trillion in 2007, while others, including US and European banks, had $1 trillion last year compared to $3.4 trillion in 2007.
In 2007, those entities held a combined volume of $10 trillion, but this dropped to $6 trillion in 2012. The velocity of that collateral fell from 3 units to 2.2 units over the five-year period.
鈥淐ollateral moves鈥攊t finds the maximum price in the chain,鈥� said Singh, adding: 鈥淪iloing is not good for financial lubrication.鈥�
Unfortunately, 鈥渃ollateral velocity鈥攐r re-use鈥攊s coming down鈥�, he said. Central banks point to institutions鈥� excess reserves as useful sources, but 鈥済ood collateral in the market has velocity鈥� and cannot be left to stagnate on balance sheets, like it did after the Lehman Brothers Crisis.
Concluding, Singh said that the collateral space has changed since the Lehman Brothers crisis, largely due to quantitative easing.
When quantitative easing programmes wind down, and new rules from Basel III and the US Dodd-Frank Act take effect, particularly leverage and liquidity coverage ratios, the collateral space will change again, added Singh.
Manmohan Singh was speaking as part of a panel discussion on the optimisation, scarcity, efficiency and eligibility of collateral.
鈥淗edge funds are the single largest suppliers of collateral,鈥� he said, followed by large banks, which act as custodians of large supplies, and then entities such as pension funds and insurers.
Hedge funds, he explained, had $1.8 trillion in pledged collateral at the end of 2012, up slightly from $1.7 trillion in 2007, while others, including US and European banks, had $1 trillion last year compared to $3.4 trillion in 2007.
In 2007, those entities held a combined volume of $10 trillion, but this dropped to $6 trillion in 2012. The velocity of that collateral fell from 3 units to 2.2 units over the five-year period.
鈥淐ollateral moves鈥攊t finds the maximum price in the chain,鈥� said Singh, adding: 鈥淪iloing is not good for financial lubrication.鈥�
Unfortunately, 鈥渃ollateral velocity鈥攐r re-use鈥攊s coming down鈥�, he said. Central banks point to institutions鈥� excess reserves as useful sources, but 鈥済ood collateral in the market has velocity鈥� and cannot be left to stagnate on balance sheets, like it did after the Lehman Brothers Crisis.
Concluding, Singh said that the collateral space has changed since the Lehman Brothers crisis, largely due to quantitative easing.
When quantitative easing programmes wind down, and new rules from Basel III and the US Dodd-Frank Act take effect, particularly leverage and liquidity coverage ratios, the collateral space will change again, added Singh.
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