Comments on “Developments in credit risk management across sectors”

A recent BIS report on “Developments in credit risk management across sectors:” raised some interesting points regarding the stability of the financial system.  What I found interesting was the increasing use of collateral agreements and in particular higher quality/more liquid assets.   If the financial system is exposed to a risk event there is a risk that this collateralisation of higher quality assets could increase the correlation of these assets to the risk event and may well end up drawing liquidity from other areas.  Likewise as risk in the system increases the need to hedge and hence post collateral may further infect expected price reactions.

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