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FIIE-4: Systemic Risk
Bank Networks and Systemic Risk: Evidence from the National Banking Acts
1U.S. Department of Treasury; 2Arizona State University
The National Banking Acts (NBAs) of 1863-1864 established rules governing the amounts and locations of interbank deposits, thereby reshaping the bank networks. Using unique data on bank balance sheets and detailed interbank deposits in 1862 and 1867 in Pennsylvania, we study how the NBAs changed the bank network structure and quantify the effect on financial stability in an interbank network model. We find that the NBAs induced a concentration of interbank deposits at both the city and the bank level, creating systemically important banks. Although the concentration facilitated diversification, contagion became more likely when financial center banks faced large shocks.
The Failure of a Clearinghouse: Empirical Evidence
1HEC Paris, CEPR; 2Bank of France
We provide the first empirical description of the failure of a derivatives clearinghouse. We use novel, hand-collected, archive data to study risk management incentives of the Paris commodity futures clearinghouse around its failure in 1974. We do not find evidence of lenient risk management during the commodity price boom of 1973-1974. However, we show severe distortions of risk management incentives, akin to risk-shifting, as soon as prices collapsed and a large clearing member approached distress. Distortions persist during the recovery/resolution phase. Theoretically, these findings suggest that capitalization and governance were weak, but do not imply that moral hazard was significant before the failure. Our results have implications for the design of clearing institutions, including their default management schemes.
Credit Risk Hedging
1Federal Reserve Bank of New York; 2University of Michigan; 3Columbia University
Do financial institutions use derivatives to hedge or take directional positions in credit risk? Using a unique dataset of positions of corporate bonds and CDS held by large financial institutions, we find that, while there is some speculative activity in the corporate CDS market, a large fraction of CDS positions are used for hedging credit risk held on other parts of the institutions' balance sheets. We link institutions' propensity to take on naked CDS positions to their regulatory constraints. Finally, we show that institutions hedge a lower fraction of the corporate bond positions they hold for investment purposes than that of the bond positions they take on during weekly trading activity.
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Conference: EFA 2017
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