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Law as a constraint on bailouts: Emergency support for central counterparties

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  • France, Virginia G.
  • Kahn, Charles M.

Abstract

Increased awareness of the importance of non-bank financial infrastructures has brought increased concern about the potential for bailouts and the resultant moral hazard problem. This paper examines the question with regard to derivatives central counterparties. We consider the layers of protection that derivatives central clearing parties (CCPs) have established in the absence of an expectation of regulatory rescue. We then provide a model of the tension between the desire for ex post rescue of a systemically important financial infrastructure and the desire to maintain ex ante discipline on the infrastructure. The model illustrates the factors that should lead to relaxation or tightening of the financial regulator's discretion for rescue. We consider examples of failures of derivatives CCPs in order to highlight the importance of these considerations.

Suggested Citation

  • France, Virginia G. & Kahn, Charles M., 2016. "Law as a constraint on bailouts: Emergency support for central counterparties," Journal of Financial Intermediation, Elsevier, vol. 28(C), pages 22-31.
  • Handle: RePEc:eee:jfinin:v:28:y:2016:i:c:p:22-31
    DOI: 10.1016/j.jfi.2016.08.005
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    References listed on IDEAS

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    1. David K. Levine & Drew Fudenberg, 2006. "A Dual-Self Model of Impulse Control," American Economic Review, American Economic Association, vol. 96(5), pages 1449-1476, December.
    2. Curzio Giannini, 2011. "The Age of Central Banks," Books, Edward Elgar Publishing, number 14371.
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    Cited by:

    1. Bignon, Vincent & Vuillemey, Guillaume, 2016. "The Failure of a Clearinghouse: Empirical Evidence," CEPR Discussion Papers 11630, C.E.P.R. Discussion Papers.
    2. Mark Paddrik & Peyton Young, 2018. "How Safe are Central Counterparties in Derivatives Markets?," 2018 Meeting Papers 934, Society for Economic Dynamics.

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