ECB Paper Examines the Interest Rate Swap Market in Euro Area

For the analysis, the authors use a novel regulatory dataset of fully identified derivatives transactions. The dataset contains 1.7 million bilateral interest rate swap transactions of banks and non-banks. The key results are as follows:

• The euro area interest rate swap market is highly standardized and concentrated not only around the group of the G16 dealers but also around a significant group of core “intermediaries” (and major central central counterparties).
• Banks are active in all segments of the interest rate swap euro market whereas non-banks are often specialized.
• When using relative net exposures as a proxy for the “flow of risk” in the interest rate swap market, the authors find that risk-absorption takes place in the core as well as the periphery of the network.
• Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining the interest rate swap trading activity of a bank.
• Also, after mandatory central clearing, there is still a large dispersion in interest rate swap transaction prices, which is partly determined by bank characteristics, such as the leverage ratio.

Related Link: Working Paper (PDF)

Keywords: Europe, EU, Banking, Interest Rate Risk, OTC Derivatives, Basel III, Clearing Obligation, Liquidity Risk, ECB