A collateral shortage could prompt a race-to-the-bottom for the quality of assets that financial institutions are willing to accept, suggest the results of a recent collateral management study. Thirty-five percent of respondents to Six Securities Services' collateral management study believe it is acceptable to accept low-quality, complex and opaque collateral as long as it is cheap. Furthermore, 57 percent said the price of collateral is more important than its quality. Somewhat paradoxically, 43 percent said collateral should be simple, high quality, liquid and easy to value. "What we're seeing here is a reaction to the cost of managing one's capital, balance sheet and the pressure on capital given all the new regulation and Basel III coming around the corner, combined with this general view that we're facing a collateral shortfall. Accepting that there is a collateral shortfall should not necessarily lead to the solution that the market should accept cheaper collateral. One does not
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