Central bankers reject collateral shortage warnings

LONDON Mon May 27, 2013 8:04pm BST

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LONDON (Reuters) - Financial industry warnings of a looming shortage in collateral due to tougher trading and banking rules are unfounded, a committee of central bankers concluded in a report on Monday.

The demand for collateral like high quality government bonds to back derivatives transactions has risen sharply due to reforms to make derivatives trading safer.

Banks no longer trust each other with unsecured funding and demand collateral, which has push up demand for it along with new rules forcing banks to build up buffers of cash to withstand a run.

The International Swaps and Derivatives Association has said derivatives may need as much as $10 trillion (6.62 trillion pounds) in initial margin on trades but a report from a committee of central bankers has questioned this.

"Current estimates suggest that the combined impact of liquidity regulation and OTC derivatives reforms could generate additional collateral demand to the tune of $4 trillion spread out over the next several years," said the Committee on the Global Financial System in a report.

"Hence, concerns about an absolute shortage of high quality assets appear unjustified," the committee said, adding that the supply of such assets used for collateral in 2012 was about $48 trillion to $53 trillion.

The report said was hard for investors to see how much of a bank's assets are "encumbered" - not freely available for sale if the bank needed cash quickly in a crisis.

The report recommended disclosure requirements on banks, such as a ratio of unencumbered to unsecured liabilities but it was too early to say if a cap on encumbrance, like in Australia, Canada and Switzerland, was needed globally.

"Market discipline can be enhanced by requiring banks to provide regular, standardised public disclosures on asset encumbrance," the report said.

"Well capitalised banks may thus have incentives to disclose information on asset encumbrance levels to retain market access in such conditions and to gain competitive advantages vis-à-vis banks with weaker balance sheets," the report said.

Supervisors should stress-test banks where encumbrance levels have become a worry, the committee said.

The committee is based at the Bank for International Settlements in Basel and helps the work of the Basel Committee on Banking Supervision which writes global bank capital rules.

(Reporting by Huw Jones; Editing by Toby Chopra)

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