Can cross-border financial markets create good collateral in a crisis?

نویسندگان

  • Makoto SAITO
  • Shiba SUZUKI
  • Tomoaki YAMADA
  • Toni Braun
  • Tomoyuki Nakajima
  • Hisashi Nakamura
چکیده

In this paper, we explore whether markets can create endogenously good collateral in a crisis by analyzing a simple model where a country-specific catastrophic shock is shared between two countries in the presence of solvency constraints. In this model, due to severe solvency constraints, realized catastrophic shocks cannot be covered fully by ex ante arrangements. However, most uninsured shocks can be financed ex post by the collateral asset created endogenously through the simultaneous expansion of financial balance sheets in both countries. A nondamaged country finances risky loans by issuing relatively safe bonds to a damaged country. Such safe bonds in turn serve as high quality collateral on which a damaged country issues risky bonds (loans) to finance uncovered losses without violating solvency constraints. The above bilateral lending works to achieve almost perfect insurance outcomes. JEL classification: F34, G12, G15.

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تاریخ انتشار 2010