Abstract
The impact of swap-related risks on the safety and soundness of the banking system has been a topic of concern. This article provides evidence that some banks may have engaged in swaps as a means to generate income when their loan activities were constrained by the fixed capital requirements. However, the results also suggest that creditworthiness plays an important role. All money center banks (too-big-to-fail) and those nonmoney center banks that are highly rated by S&P experience higher swap demand and achieve higher swap market shares. This implies some market discipline for nonmoney center banks, which may compensate for risk-measurement inadequacies in the current risk-based capital requirements. On the other hand, the results suggest that greater oversight may be required for money center banks.
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