Netting, Financial Contracts, and Banks: The Economic Implications

45 Pages Posted: 24 Feb 2004  

William J Bergman

Federal Reserve Bank of Chicago - Research Department

Robert R. Bliss

Wake Forest University - Schools of Business

Christian A. Johnson

Widener University - Commonwealth Law School

George G. Kaufman

Loyola University Chicago

Date Written: January 2004

Abstract

Derivatives and certain other off-balance sheet contracts enjoy special legal protection on insolvent counterparties through a process referred to as close-out netting. This paper explores the legal status and economic implications of this protection. While this protection benefits major derivatives dealers and derivatives markets, it is less clear that other market participants or markets in general are better or worse off. While we are not able to conclude whether or not these protections are socially optimal, we outline the wide range of issues that a general consideration of the pros and cons of netting protection should take into cognizance, and analyze some of these issues critically. Ultimately the question becomes one of quantifying complex trade-offs.

JEL Classification: K23, K41, G28

Suggested Citation

Bergman, William J and Bliss, Robert R. and Johnson, Christian A. and Kaufman, George G., Netting, Financial Contracts, and Banks: The Economic Implications (January 2004). FRB of Chicago Working Paper No. 2004-02. Available at SSRN: https://ssrn.com/abstract=505965 or http://dx.doi.org/10.2139/ssrn.505965

William J Bergman (Contact Author)

Federal Reserve Bank of Chicago - Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Robert R. Bliss

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States
336-758-5957 (Phone)
336-758-6133 (Fax)

Christian A. Johnson

Widener University - Commonwealth Law School ( email )

3800 Vartan Way
Harrisburg, PA 17110-9380
United States
717.541.3902 (Phone)

George G. Kaufman

Loyola University Chicago ( email )

820 North Michigan Avenue
School of Business
Chicago, IL 60611
United States
312-915-7075 (Phone)
312-915-8508 (Fax)

HOME PAGE: http://www.luc.edu/faculty/gkaufma/

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