Bank Lending and Interest- Rate Derivatives

Fang Zhao and James Moser

International Journal of Financial Research, 2017, vol. 8, issue 4, 23-37

Abstract: Using data that cover a full business cycle, this paper documents a direct relationship between interest-rate derivative usage by U.S. banks and growth in their commercial and industrial (C&I) loan portfolios. This positive association holds for interest-rate options contracts, forward contracts, and futures contracts. This result is consistent with the implication of Diamond¡¯s model (1984) that predicts that a bank¡¯s use of derivatives permits better management of systematic risk exposure, thereby lowering the cost of delegated monitoring, and generates net benefits of intermediation services. The paper¡¯s sample consists of all FDIC-insured commercial banks between 1996 and 2004 having total assets greater than $300 million and having a portfolio of C&I loans. The main results remain after a robustness check.

Keywords: banking; derivatives; intermediation; swaps; futures; option; forward (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:jfr:ijfr11:v:8:y:2017:i:4:p:23-37

DOI: 10.5430/ijfr.v8n4p23

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