Introduction

This chapter presents an approach to estimate tail risk measures for a portfolio of collateralized lending operations. While the general method is applicable to any repo portfolio, this chapter presents an application of the approach to the estimation of the residual risks of the Eurosystem's collateralized lending operations (which on average exceeded half a trillion euro during 2006).

This chapter can be viewed as extending one of the specific steps constituting any collateralization framework as described in Chapter 7 Section 2.4 (‘Monitoring the use of the collateral framework and related risk taking’). Any efficient collateralization framework will provide some discretion to counterparties on what types of collateral to use, and to what extent. This discretion implies that the actual risk taking, for instance driven by concentration risks, cannot be anticipated. The central bank only can ensure that the outcome is actually acceptable by closely monitoring the actual use of the collateralization framework by counterparties, and establishing a sound methodology to measure residual risks. If it is not acceptable, specific changes to the framework are necessary to address the non-anticipated (concentration) risks that arose. The thorough monitoring is the precondition for a collateralization framework that provides leeway to counterparties, and therefore also for an efficient framework.

For the implementation of monetary policy, the Eurosystem has a number of instruments available of which liquidity-providing reverse transactions have so far been the most important.