BIS Targets Prime-Broker Risk

The BIS quarterly review contains an assessment of the risk prime brokers may pose both to GSIBs and financial stability.  This sector has long been a concern of central bankers and risk managers, but the BIS analysis is the first in recent years to quantify it and decompose key risk drivers (e.g., wrong-way risk) to conclude that the inter-connections between hedge funds and prime brokers are a source of systemic instability and potential hazard to banks as evidenced all too clearly last year at Credit Suisse.  These risks are of course also a key part of the Fed’s new exploratory stress-test related to hedge funds (see Client Report STRESS32).