tailieunhanh - NBER Macroeconomics Annual 1995, Volume 10

The different implications of high government debt and unsustainable public finances should be reflected in prices for government securities. The existence and implementation of the European fiscal framework should therefore have a twofold effect. First, the credibility of the European fiscal framework and its ability to deter “excessive” deficits and debt in the perception of market participants generally affect future risks associated with liabilities of all member states. Second, the surveillance process could reveal information to market participants when valuing individual government liabilities. Either due to the perception of the credibility of the framework or the information content of the surveillance procedure, these budgetary institutions should affect the risk. | This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title NBER Macroeconomics Annual 1995 Volume 10 Volume Author Editor Ben S. Bernanke and Julio J. Rotemberg eds. Volume Publisher MIT Press Volume ISBN 0-262-02394-6 Volume URL http books bern95-1 Conference Date March 10-11 1995 Publication Date January 1995 Chapter Title Banks and Derivatives Chapter Author Gary Gorton Richard Rosen Chapter URL http chapters c11023 Chapter pages in book p. 299 - 349 Gary Gorton and Richard Rosen THE WHARTON SCHOOL UNIVERSITY OF PENNSYLVANIA AND NBER AND THE WHARTON SCHOOL UNIVERSITY OF PENNSYLVANIA Banks and Derivatives 1. Introduction In the last ten to fifteen years financial derivative securities have become an important and controversial These securities are powerful instruments for transferring and hedging risk. However they also allow agents to quickly and cheaply take speculative risk. Determining whether agents are hedging or speculating is not a simple matter because it is difficult to value portfolios of derivatives. The relationship between risk and derivatives is especially important in banking since banks dominate most derivatives markets and within banking derivative holdings are concentrated at a few large banks. If large banks are using derivatives to increase risk then recent losses on derivatives such as those of Procter and Gamble and of Orange County may seem small in comparison with the losses by banks. If in addition the major banks are all taking similar gambles then the banking system is vulnerable. This paper is the first to estimate the market-value and interest-rate sensitivity of bank derivative positions. We focus on a single important derivative security interest-rate swaps and find evidence that the banks as a whole take the same side in interest-rate swaps. The banking system s net position is somewhat interest-rate sensitive. Relatively small increases in .