G2 - Financial Institutions and Services

• Is This Normal? The Cost of Assuming that Derivatives Have Normal Returns

  Staff Working Paper 2024-46 Radoslav Raykov

  Derivatives exchanges often determine collateral requirements, which are fundamental to market safety, with dated risk models assuming normal returns. However, derivatives returns are heavy-tailed, which leads to the systematic under-collection of collateral (margin). This paper uses extreme value theory (EVT) to evaluate the cost of this margin inadequacy to market participants in the event of default.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Financial stability JEL Code(s): G, G1, G10, G11, G2, G20

• Mortgage stress tests and household financial resilience under monetary policy tightening

  Staff Analytical Note 2024-25 Jonathan Hartley, Nuno Paixão

  This note analyzes mortgage stress tests, a macroprudential tool. We find that when mortgage stress tests are applied to all mortgage purchase originations, they improve credit quality and reduce credit and house price growth. They also improve the resilience of borrowers to financial shocks, such as the large increase in interest rates during 2022–23.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Credit and credit aggregates, Financial institutions, Financial system regulation and policies, Monetary policy JEL Code(s): E, E5, E52, G, G2, G21, G28, G5, G50, G51