The Failure of a Clearinghouse: Empirical Evidence*

Counterparty risk externality: centralized versus over-the-counter markets

Vincent Bignon and Guillaume Vuillemey

Review of Finance, 2020, vol. 24, issue 1, 99-128

Abstract: How can we design safe financial institutions, and how should we efficiently resolve them? We study these questions by empirically analyzing the failure of a derivatives central clearing counterparty (CCP) in Paris in 1974. First, we identify the risk management failures that caused the default and draw implications for CCP design. Second, we show evidence of new agency problems arising when supervisors have discretionary powers over debt restructuring for a failed entity. These conflicts, between managers and the supervisor (misreporting), as well as between managers and creditors (risk-shifting), are difficult to mitigate with regulation or covenants. Their existence has implications for the design of recovery and resolution rules for financial institutions.

Keywords: Central clearing; Resolution; Financial distress; Risk-shifting (search for similar items in EconPapers)
JEL-codes: G23 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://hdl.handle.net/10.1093/rof/rfy039 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: The Failure of a Clearinghouse:Empirical Evidence (2017)
Working Paper: The Failure of a Clearinghouse: Empirical Evidence (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:revfin:v:24:y:2020:i:1:p:99-128.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Review of Finance is currently edited by Marcin Kacperczyk

More articles in Review of Finance from European Finance Association Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().