Banks and Derivatives

Rodney L. White Center for Financial Research Working Paper No. 6-95

Posted: 22 Aug 1998

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research

Multiple version iconThere are 2 versions of this paper

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.

JEL Classification: G21

Suggested Citation

Gorton, Gary B. and Rosen, Richard J., Banks and Derivatives. Rodney L. White Center for Financial Research Working Paper No. 6-95, Available at SSRN: https://ssrn.com/abstract=6103

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National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

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Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research ( email )

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