The Department of Finance and Risk Engineering welcomes Samim Ghamami, Senior Researcher at NYU and UC Berkeley, Senior Economist and Managing Director at the Financial Services Forum, and an Adjunct Professor of Finance at New York University, to the BQE Lecture Series.
The Impact of Collateral and Stays on Financial Stability
We study the spread of losses and defaults in financial networks with two features: collateral requirements and resolution and bankruptcy stay rules. When collateral is committed to a firm’s counterparties, a solvent firm may default if it lacks sufficient liquid assets to meet its payment obligations. Collateral requirements can thus increase the risk of contagion. Moreover, one firm may benefit from the failure of another if the failure frees collateral committed by the surviving firm, giving it additional resources to make other payments. Contract termination at default may also similarly improve the ability of other firms to meet their obligations. As a consequence of these features, the timing of payments and collateral liquidation must be carefully specified to establish the existence of payments that clear the
network. Using this framework, we show that committed collateral in the form of initial margin in over-the-counter derivatives markets may increase contagion and financial instability. We also compare networks under different stay rules in OTC markets. Our analysis shows that when firms are not highly leveraged in terms of derivatives transactions, full contract termination may reduce contagion.
Samim Ghamami is a senior researcher at NYU and UC Berkeley, the senior economist and managing director at the Financial Services Forum, and an adjunct professor of finance at New York University. Ghamami also serves on the advisory board of the Mathematics in Finance Program at the NYU Courant Institute. He has also been a senior financial economist and senior vice president at Goldman Sachs, an associate director, and a senior economist at the U.S. Department of the Treasury, Office of Financial Research, and an economist at the Board of Governors of the Federal Reserve System.
Ghamami’s work has broadly focused on financial economics and more recently on the interplay of finance and macroeconomics. Ghamami has been an advisor to the Bank for International Settlements and has also worked as an expert with the Financial Stability Board on post-financial crisis reforms. He served on the National Science Foundation panel on Financial Mathematics in 2017 and 2018.