Warding off financial market failure

A market failure in the setting of margin requirements and haircuts led to an exacerbation of both the financial boom of the past decade and the financial bust, whose aftershocks are felt Rigorous external review today. [...] The social impact on the financial system through the benefits of these recommendations in terms cycle, and to explore and analyse the desirability of reducing the excessive procyclicality of of various alternatives for reducing the the financial system and the costs of any procyclical effect of margining practices on future financial crises are seen as exceeding asset prices.” This study group pu [...] In the approach to policy originated at the Bank contract governing such a transaction, a for International Settlements with the idea haircut is specified that determines the of looking “beyond the risk position of overcollateralization of the transaction, individual institutions to risks affecting the which protects the seller against a large part system as a whole (Turner 2010).” of the market r [...] Thus far, the only clear international A market failure exists in the form of a proposals for the countercyclical use of negative externality associated with the macroprudential instruments are for setting of haircuts and initial margin terms; countercyclical capital requirements because the setting of these terms is developed by the Basel Committee on procyclical, what appears to be reasonable Ba [...] To approach could be particularly important for encourage such practices and to remove a the application in Canada and other capital incentive to use credit triggers, countries of the two major procyclicality Canada should adopt the recommendation recommendations dealing with through-the- to discourage and dampen the effects of cycle haircuts and margin requirements and credit triggers, even thoug