The Economic Impact of Client Losses on OTC Bank Derivatives Dealers : Evidence from the Capital Markets

This paper investigates the economic impact of client derivatives losses on OTC derivatives dealers. Its focus is on the capital market's reaction to losses suffered by four end-users of OTC derivatives products arranged with Bankers Trust NY. Evidence is provided on the impact of these end- user losses on Bankers Trust itself, as well as whether these losses produced any systemic or contagion effects extending to other major bank OTC derivatives dealers. Finally, the paper investigates whether possible systemic effects may be associated with bank specific characteristics such the level of derivatives exposure, counterparty risk, and reliance on trading income