In this paper, global regulators take an in-depth look at an emerging concern – potential scarcity of the high-quality assets (HQAs) used to collateralize unsecured exposures – to assess market and regulatory risks. These same assets are vital not only as collateral for derivatives and securities-financing transactions, but also as “high-quality liquid assets” (HQLAs) for purposes of the Basel liquidity standards. The HQAs are also given favorable treatment in both bank and insurance regulatory-capital schemes, increasing demand for them across the financial sector. The more collateral-eligible assets held by banks and investors, the safer each entity is and the financial system as a whole may appear. However, as this paper concludes, unanticipated and unintended results may counter this seeming stability. As intra-systemic exposures increase, the amount of truly unsecured debt available to prevent taxpayer risk drops and other adverse financial-stability consequences ensue. Large holdings of HQAs could also prove procyclical, exacerbating boom-bust cycles with damaging macroeconomic consequences. As a result, global regulators recommend an array of micro- and macro-prudential standards in this arena with significant implications for securities-financing transactions (SFT), derivatives and large financial-services firms.
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