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CCPs can certainly help prevent a reoccurrence of what happened with Lehman Brothers, where, unlike the Treasury, the market didn't know that Lehmans net exposu

CCPs can certainly help prevent a reoccurrence of what happened with Lehman Brothers, where, unlike the Treasury, the market didn't know that Lehmans net exposure was relatively small (~$6bn if I recall correctly) compared to the hundreds of billions worth of derivatives it had written, and therefore were scared that if they kept extending credit, they'd be left holding the can if Lehmans went under. Under the new regulatory regime, a re-run of the 2008 financial crisis would have engendered far less FUD and Lehmans could well have survived. Nobody would have been scared that Lehmans' potential inability would have represented an existential threat to their firm because only the CCPs would have been exposed. (This is a gross simplification but you get the point.) However, as the article makes clear, the counterparty risk is now all concentrated in just a few CCPs. We also don't know how the market will evolve after central clearing becomes mandatory. The markets have a habit of behaving with a certain ruthless efficiency when it comes to exploiting loopholes or opportunities created by regulation so, like the army that prepares for the last war, the new regulatory regime may not protect against emergent market risks and behaviours.

eru 10y ago
One alternative would be for the regulators no longer requiring minimum standards (and giving implicit guarantees for anyone meeting those minimum standards); but instead requiring banks and other market participants to regularly reveal all their positions. Perhaps with a lag of six months or a year to let them protect trade secrets for a while.
cm2187 10y ago
I think it is rather the contrary. There has been a fundamental regulatory change that would make it more likely that a Lehman would go bust and that's a good thing: the introduction of bail-in. Bail-in is the power given to the regulator to declare a bank non viable and to impose losses on its creditor over a week end, and as a result auto-recapitalise the bank, which will be open for business and healthy the following Monday. You can see it as a flash, extra-judiciary chapter 11. The regime is designed to impose losses on regular creditors (bond holders), rather than clients taking a credit exposure to the bank through derivatives or deposits, even if in a bankruptcy these would have the same ranking and should suffer the same losses. This should reduce a lot the disruption on the market of a bank going bad. Banks have been required to hold minimum levels of bailinable wholesale debt to ensure regulators can do a large scale bail-in. This a fundamental shift which banks, regulators, and large bank creditors are well aware of, but seems to be completely unkown to the general public. That's kind of as absurd as keeping the dooms day machine secret in Dr Strangelove. The ability to do bail-in is probably the main factor that reduced dramatically the risk of another 2008-style financial crisis.

eru 10y ago

One alternative would be for the regulators no longer requiring minimum standards (and giving implicit guarantees for anyone meeting those minimum standards); but instead requiring banks and other market participants to regularly reveal all their positions. Perhaps with a lag of six months or a year to let them protect trade secrets for a while.

cm2187 10y ago

I think it is rather the contrary. There has been a fundamental regulatory change that would make it more likely that a Lehman would go bust and that's a good thing: the introduction of bail-in. Bail-in is the power given to the regulator to declare a bank non viable and to impose losses on its creditor over a week end, and as a result auto-recapitalise the bank, which will be open for business and healthy the following Monday. You can see it as a flash, extra-judiciary chapter 11. The regime is designed to impose losses on regular creditors (bond holders), rather than clients taking a credit exposure to the bank through derivatives or deposits, even if in a bankruptcy these would have the same ranking and should suffer the same losses. This should reduce a lot the disruption on the market of a bank going bad. Banks have been required to hold minimum levels of bailinable wholesale debt to ensure regulators can do a large scale bail-in. This a fundamental shift which banks, regulators, and large bank creditors are well aware of, but seems to be completely unkown to the general public. That's kind of as absurd as keeping the dooms day machine secret in Dr Strangelove. The ability to do bail-in is probably the main factor that reduced dramatically the risk of another 2008-style financial crisis.