Office Of Financial Research Updates Research On Banks’ Counterparty Choices

Today, the OFR updated a working paper examining whether banks’ counterparty choices in over-the-counter derivative markets contribute to network fragility.  The authors found that banks have a greater propensity to choose densely connected nonbank counterparties, particularly riskier ones, suggesting the existence of “moral hazard behavior” in network formations.  Finally, the working paper shows how these exposures are correlated with systemic risk measures despite greater regulatory oversight after the 2008 financial crisis.

The working paper can be found here.

The OFR homepage is -  https://www.financialresearch.gov/.