The reasons for this uncertainty are spelt out in a recent report by the Committee on the Global Financial System (CGFS) at the Bank for International Settlements (BIS).1 The report noted that financial institutions are likely to respond to the increased calls for collateral by changing the way they do business.
Some change is clearly desirable, given that a number of risks were previously underpriced. But if past experience is any guide, as prices change and the demand for collateral increases, financial institutions will seek to manage their collateral more efficiently and this is likely to increase interconnections in the financial system.