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Banks and Derivatives

In: NBER Macroeconomics Annual 1995, Volume 10

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  • Gary Gorton
  • Richard Rosen

Abstract

In the last ten to fifteen years financial derivative securities have become an important, and controversial, product for commercial banks. The controversy concerns whether the size, complexity, and risks associated with these securities, the difficulties with accurately reporting timely information concerning the value of firms’ derivative positions, and the concentration of activity in a small number of firms, has substantially increased the risk of collapse of the world banking system. Despite the widespread attention to derivatives, there has been little systematic analysis. We estimate the market values and interest-rate sensitivity of interest rate swap positions of U.S. commercial banks to empirically address the question of whether swap contracts have increased or decreased systemic risk in the U.S. banking system. We find that the banking system as a whole faces little net interest-rate risk from swap portfolios.

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This chapter was published in:

  • Ben S. Bernanke & Julio J. Rotemberg, 1996. "NBER Macroeconomics Annual 1995, Volume 10," NBER Books, National Bureau of Economic Research, Inc, number bern95-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11023.

    Handle: RePEc:nbr:nberch:11023

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    1. Gary Gorton & Richard Rosen, 1992. "Corporate control, portfolio choice, and the decline of banking," Finance and Economics Discussion Series 215, Board of Governors of the Federal Reserve System (U.S.).
    2. James Dow & Gary Gorton, 1994. "Noise Trading, Delegated Portfolio Management, and Economic Welfare," NBER Working Papers 4858, National Bureau of Economic Research, Inc.
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