| dc.description.abstract | The financial crisis and the euro sovereign debt crisis highlighted the need to strengthen the resilience of the financial markets. One consequence is that financial market participants today use collateral extensively in a range of transactions. In lending, in securities and derivatives trading, and in payment and settlement systems. Likewise, central banks generally require collateral in their credit operations. With the growth of collateral, the range of assets accepted as collateral has broadened, opening for more risky collateral.
Whenever new financial instruments or financial market regulations are introduced, it is relevant to ask two questions. First, how well do the innovations fulfil the purpose they are intended to serve? Second, are there any unintended side-effects?
In this thesis I present three essays that investigate aspects of the increased reliance on collateral to secure claims in financial markets. The essays have attention on banks' behaviour, and the empirical studies use primarily data from the bond market financing of banks.
In the first essay I investigate how banks' use of secured financing affects the optimal equity capital structure of banks. Due to changes in the optimal positioning, the net effect on bond risk is small. However, the effects on shareholder value and public sector liability are significant. I show that debt regulations can represent a better way to motivate banks to increase capital and promote financial stability than increased capital requirements. In the second essay I show that the risk protection offered by risky collateral is conditional on the economic state. The correlation between the bad state and the collateral value is crucial when assessing the risk reducing properties of collateral. In the final essay I study the value, if any, of collateral as a way of reducing risk in credit portfolios that already are diversified. I find that the risk reduction from collateral wears off once the initial portfolio size increases. Diversified lenders have little to gain from collateral.
Understanding the nature of collateral and related risks is relevant to financial institutions, investors, rating agencies, regulators, and academics. | nb_NO |
