This paper examines the effect of heterogeneity in banks’ exposure management
practice on the system-wide expected exposure under central clearing. Our
network model specifies the dynamics of pre-netted interbank exposures as a joint
stochastic process that shapes interdependent bank-to-bank exposure distributions
beyond normality. Employing OTC derivatives market data provided by the U.S.
Office of the Comptroller of the Currency, our simulation results indicate that the
heterogeneity in the bank-to-bank exposure dynamics and size is systemically desirable
in general, while the entire system benefits more from central clearing in a
more homogeneous environment. Furthermore, policymakers should incentivize individual
banks to enhance the resiliency and stability in the counterparty exposure
management to maximize netting efficiency under central clearing.
Keywords: Central Clearing; Exposure Distribution; Netting Efficiency; Heterogeneity; Simulation; Stochastic Network Mode
