Discussion paper

DP18570 Margins, debt capacity, and systemic risk

Debt capacity depends on margins. When set in a financial system context with collateralized borrowing, two additional features emerge. The first is the recursive property of leverage whereby higher leverage by one player begets higher leverage overall, reflecting the nature of debt as collateral for others. The second feature is that the “dash for cash” is the mirror image of deleveraging. In any setting where market participants engage in margin budgeting, a generalized increase in margins entails a shift of the overall portfolio away from riskier to safer assets. These findings have important implications for the design of non-bank financial intermediary (NBFI) regulations and of central bank backstops.


Aramonte, S, A Schrimpf and H Shin (2023), ‘DP18570 Margins, debt capacity, and systemic risk‘, CEPR Discussion Paper No. 18570. CEPR Press, Paris & London. https://cepr.org/publications/dp18570