This paper assesses the sensitivity of the risk buffers, or capital requirements, of central counterparties clearing over-the-counter derivatives trades to a range of model inputs. It finds capital requirements to be highly sensitive to whether key model parameters are calibrated on a point-in-time versus stress-period basis, whether the risk tolerance metric adequately captures tail-risk events, and the ability – or lack thereof – to define exposures on the basis of netting sets spanning multiple risk factors. Our results suggest that there are considerable benefits from prudential authorities adopting a more prescriptive approach to central counterparties’ risk buffers, in line with recent enhancement of the capital regime for banks’ trading books.

We assess the role that monetary policy plays in the decision to default using a General Equilibrium model with collateralized loans, trade in fiat money and production. The monetary authority extends long-term credit against risky collateral along with its traditional monetary operations. The value of collateral depends on traditional monetary policy and agents can optimally choose to default depending on the relative value of the collateral to the face value of the loan. Default results in foreclosure, higher borrowing costs, inefficient investment and a decrease in total output. We show that pre-crisis contractionary monetary policy interacts with Fisherian debt-deflation dynamics and can increase the probability that a crisis occurs.