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Banks and Derivatives

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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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Paper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 6-95.

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Handle: RePEc:fth:pennfi:6-95

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  1. Gary Gorton & Richard Rosen, . "Corporate Control, Portfolio Choice, and the Decline of Banking," Rodney L. White Center for Financial Research Working Papers 2-93, Wharton School Rodney L. White Center for Financial Research.
  2. James Dow & Gary Gorton, . "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Rodney L. White Center for Financial Research Working Papers 19-94, Wharton School Rodney L. White Center for Financial Research.
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