Banks and Derivatives

Gary Gorton and Richard Rosen

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

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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Chapter: Banks and Derivatives (1995)
Working Paper: Banks and derivatives (1995)
Working Paper: Banks and Derivatives (1995)
Working Paper: Banks and Derivatives
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