Derivatives Activity at Troubled Banks
Derivatives have become an essential instrument for hedging risks, yet moral hazard can lead to their misuse by problem banks. Given that the absence of comprehensive data on bank derivatives activities prevents an accurate assessment of bank risk-taking, banks have an opportunity to take unmonitored second bets. Thus, troubled banks have the motive to increase risk, and derivatives provide the means to do so. The role of bank supervisors should be to limit the opportunity through more comprehensive data reporting requirements and closer supervisory scrutiny of derivatives activity at problem banks. Because a relatively large number of banks active in the derivatives market have low capital ratios and are considered institutions with a significant risk of failure by bank supervisors, the possible misuse of derivatives by troubled banks should be of concern to regulators. However, we find no evidence that the volume of derivatives activity at troubled banks affects the probability of formal regulatory intervention or even a downgrade in supervisory rating.
|Date of creation:||Nov 1996|
|Contact details of provider:|| Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA|
Web page: http://fmwww.bc.edu/EC/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert B. Avery & Allen N. Berger, 1989.
"Loan commitments and bank risk exposure,"
Finance and Economics Discussion Series
65, Board of Governors of the Federal Reserve System (U.S.).
- Robert B. Avery & Allen N. Berger, 1988. "Loan commitments and bank risk exposure," Finance and Economics Discussion Series 36, Board of Governors of the Federal Reserve System (U.S.).
- Robert B. Avery & Allen N. Berger, 1990. "Loan commitments and bank risk exposure," Working Paper 9015, Federal Reserve Bank of Cleveland.
- Katerina Simons, 1995. "Interest rate derivatives and asset-liability management by commercial banks," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 17-28.
- Sinkey, Joseph F, Jr, 1975. "A Multivariate Statistical Analysis of the Characteristics of Problem Banks," Journal of Finance, American Finance Association, vol. 30(1), pages 21-36, March.
- Sinkey, Joseph F, Jr, 1978. "Identifying "Problem" Banks: How Do the Banking Authorities Measure a Bank's Risk Exposure?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(2), pages 184-193, May.
- Peek, Joe & Rosengren, Eric, 1995.
"Bank regulation and the credit crunch,"
Journal of Banking & Finance,
Elsevier, vol. 19(3-4), pages 679-692, June.
- Gary Gorton & Richard Rosen, "undated".
"Banks and Derivatives,"
Rodney L. White Center for Financial Research Working Papers
6-95, Wharton School Rodney L. White Center for Financial Research.
- Gary Gorton & Richard J. Rosen, 1995. "Banks and derivatives," Working Papers 95-12, Federal Reserve Bank of Philadelphia.
- Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," Center for Financial Institutions Working Papers 95-07, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Gary Gorton & Richard Rosen, "undated". "Banks and Derivatives," Rodney L. White Center for Financial Research Working Papers 06-95, Wharton School Rodney L. White Center for Financial Research.
- Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," NBER Working Papers 5100, National Bureau of Economic Research, Inc.
- Gary Whalen & James B. Thomson, 1988. "Using financial data to identify changes in bank condition," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 17-26.
- Koppenhaver, G. D. & Stover, Roger D., 1991. "Standby letters of credit and large bank capital: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 15(2), pages 315-327, April.
- Boyd, J.H. & Gertler, M., 1993.
"U.S. Commercial Banking: Trends, Cycles, and Policy,"
93-19, C.V. Starr Center for Applied Economics, New York University.
- John H. Boyd & Mark Gertler, 1993. "U.S. Commercial Banking: Trends, Cycles, and Policy," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 319-377 National Bureau of Economic Research, Inc.
- John H. Boyd & Mark Gertler, 1993. "U.S. Commercial Banking: Trends, Cycles, and Policy," NBER Working Papers 4404, National Bureau of Economic Research, Inc.
- Joe Peek & Eric S. Rosengren, 1995. "Banks and the availability of small business loans," Working Papers 95-1, Federal Reserve Bank of Boston.
- Jagtiani, Julapa & Saunders, Anthony & Udell, Gregory, 1995. "The effect of bank capital requirements on bank off-balance sheet financial innovations," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 647-658, June.
- Joe Peek & Eric S. Rosengren, 1996.
"Will legislated early intervention prevent the next banking crisis?,"
96-5, Federal Reserve Bank of Boston.
- Joe Peek & Eric S. Rosengren, 1996. "Will Legislated Early Intervention Prevent the Next Banking Crisis?," Boston College Working Papers in Economics 359, Boston College Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:boc:bocoec:358. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.