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Vincent Bignon, Guillaume Vuillemey, The Failure of a Clearinghouse: Empirical Evidence, Review of Finance, Volume 24, Issue 1, February 2020, Pages 99–128, https://doi.org/10.1093/rof/rfy039
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Abstract
How can we design safe financial institutions, and how should we efficiently resolve them? We study these questions by empirically analyzing the failure of a derivatives central clearing counterparty (CCP) in Paris in 1974. First, we identify the risk management failures that caused the default and draw implications for CCP design. Second, we show evidence of new agency problems arising when supervisors have discretionary powers over debt restructuring for a failed entity. These conflicts, between managers and the supervisor (misreporting), as well as between managers and creditors (risk-shifting), are difficult to mitigate with regulation or covenants. Their existence has implications for the design of recovery and resolution rules for financial institutions.
