NEW YORK– Even as the recent failure of several banks has put the attention on regional banks, regulators are “raising the alarm” about the risks to another corner of the market: clearinghouse, according to a new report.
If a bank failure were to leave one of them without access to cash, widespread market “instability would follow,” stated the report by the New York Times’ Dealbook section.
“Why take that risk?” Summer Mersinger, a member of the Commodity Futures Trading Commission, asked DealBook.
As the report explained, clearinghouses exist to mitigate risk, taking collateral and settling transactions between buyers and sellers in all kinds of financial markets. This means a bank’s failure could easily lead to losses for a clearinghouse that “could potentially reverberate across the financial system,” Dealbook reported, citing a 2020 report by the Chicago Fed.
Cascading Effect
Even without a complete failure at a commercial bank, delays in access to cash could trigger liquidity issues across markets, the report went on to note.
“The Minneapolis Grain Exchange is not a systemically important entity to the U.S. financial system, but they may have billions of dollars in margin, and at the end of the day they don’t have a place to safely secure it,” Mersinger told the New York Times. “That has a lot of consequences.”
According to the analysis, regulators say there is a simple fix: Allow more clearinghouses to deposit their cash at the Fed. Only a few have been designated “systemically important,” which means they are allowed to do so, the report states.
“But smaller clearinghouses rely on commercial banks, where deposit insurance covers only up to $250,000. If a bank collapses, those clearinghouses may not be covered or may have problems accessing their cash,” Dealbook added.
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