THE PROBLEM WITH CLEARINGHOUSES

2nd chapter of a series on clearinghouses

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As pointed out in the first presentation, we have moved from a decentralised financial system to a centralised financial system, based around clearinghouses.

In the pre-crisis model, banks were the ones pricing risk, and were also the ones taking risk. Risk was priced on a forward looking basis, and also reflected the risk attitude of the banks. Under the new model, the clearinghouse prices risk, but almost all of the risk is passed on to the underlying members of the clearinghouse. Risk is not priced by the people taking the risk, which for me is the fundamental problem with this putting clearinghouses at the centre of the financial system.

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