Journal Article
Reforming the over-the-counter derivatives market: what’s to be gained?
Craig, Ben R.; Cherny, Kent (2010-07)
While derivative financial instruments have made the hedging and exchange of risk more efficient, the recent crisis showed that they also pose a substantial threat to financial stability in times of systemic turmoil. Underlying much of this threat is the lack of transparent reporting in the over-the-counter market for these instruments. This Commentary discusses the advantages of one solution to the transparency proble: moving the settlement or trading of derivatives to exchanges or clearinghouses.
Economic Commentary , Issue Jul

Journal Article
Effective practices in crisis resolution and the case of Sweden
Cherny, Kent; Ergungor, O. Emre (2009-02)
The current financial crisis is a painful reminder that the developed world is not yet immune to these devastating shocks. But while we haven?t learned to prevent them, we have learned some lessons about what is necessary to contain them once they begin and to limit the damage that follows. As policymakers worldwide focus on resolving the current financial crisis, they might look to Sweden as a useful model for effective strategies.
Economic Commentary , Issue Feb

Journal Article
Compensation and risk incentives in banking and finance
Milbourn, Todd T.; Cai, Jian; Cherny, Kent (2010-09)
We review why executive compensation contracts are often structured the way they are, analyze risk incentives stemming from various pay schemes, and examine the tendency of the banking and finance industry toward excessive risk-taking. Studying the typical executive pay structures in banking and finance before the financial crisis reveals some potentially problematic practices. These practices may have encouraged ?short-termism? and excessive risk-taking, which are two behaviors bank regulators aim to prevent with their recently issued guidance on incentive compensation.
Economic Commentary , Issue Sep

Journal Article
Credit default swaps and their market function
Cherny, Kent; Craig, Ben R. (2009-07)
Credit derivative instruments allow default risk to be segregated from debt of all kinds. They have granted investors the ability to hedge their portfolios and provided numerous institutions with a new source of income. However, the market for credit default swaps is neither transparent nor regulated, perhaps undermining the stability of the financial system it has helped innovate.
Economic Commentary , Issue Jul