That means that less conservative haircuts would sometimes be required to support a given level of borrowing. That will benefit counterparties as well as deliver risk management benefits to the Bank. The Bank will also require the data to be made available to investors and other market professionals, so that they will be able to undertake their own risk analysis. That should deliver longer-term benefit to the financial system as a whole – standardising, simplifying and publicising the data should all reduce the mechanical reliance on third party judgments and  8  The counterparty can meet the margin call by either providing more collateral, substituting some of the existing collateral with higher quality assets which receive a smaller haircut, or returning some of the lent funds. 9  The aim would be for the Bank’s risk tolerance to be broadly the same for loans as for a securitisation of those same loans, so as not to provide incentives to submit one form of collateral over the other. BIS central bankers’ speeches  7  models, and hence reduce “single points of failure” within the ABS market (although it will be up to market participants to make best use of these changes). Other policy issues on the agenda There are some big issues facing the Bank and its collateral management going forward. The immediate challenge is to wind down the SLS to its conclusion in January 2012.
And all the narrow collateral previously eligible will remain permissible under the new regime as either narrow or wider collateral. 6  Of course any drawdown is predicated on the counterparty being expected to remain solvent. 7  This is in line with new FSB principles aimed at reducing the extent to which ratings are “hard-wired” into financial contracts. BIS central bankers’ speeches  5  Chart 3 Metrics of sovereign credit risk, market liquidity and size(a) US France Germany Netherlands Canada UK Italy Spain Belgium Austria Australia Sweden Denmark Finland Norway  5 yr CDS premia  300 250 200 150 100 50 0 -1  0 -50  1  2  3  4  5  6  7  10yr bond bid-offer spread (bps)  (a) The size of the bubbles is representative of the total amount of sovereign debt outstanding (in sterling terms). Ireland and Portugal are not shown, as their respective bubbles lie significantly to the north-east of the other countries identified in the Chart. Bubbles for Cyprus, Japan, Luxemburg, New Zealand, Slovenia and Switzerland are also not shown for clarity (although they are accepted as wider collateral). Data as at 11 April. Valuation The Bank’s valuation of collateral plays a key role in protecting the Bank against loss in the event of a counterparty default. Where available, the Bank uses market prices to value a security.