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Derivatives Holdings and Systemic Risk in the U.S. Banking Sector

María Rodríguez-Moreno (), Sergio Mayordomo () and Juan Ignacio Peña ()
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María Rodríguez-Moreno: European Central Bank
Juan Ignacio Peña: Department of Business Administration, Universidad Carlos III de Madrid

No 21/12, Faculty Working Papers from School of Economics and Business Administration, University of Navarra

Abstract: This paper studies the impact of the banks portfolio holdings of financial derivatives on the banks individual contribution to systemic risk over and above the effect of variables related to size, interconnectedness, substitutability, and other balance sheet information. Using a sample of 91 U.S. bank holding companies from 2002 to 2011, we compare five measures of the banks contribution to systemic risk and find that the new measure proposed in this study, Net Shapley Value, outperforms the others. Using this measure we find that the banks holdings of foreign exchange and credit derivatives increase the banks contributions to systemic risk whereas holdings of interest rate derivatives decrease it. Nevertheless, the proportion of non-performing loans over total loans and the leverage ratio have much stronger impact on systemic risk than derivatives holdings. We find that before the subprime crisis credit derivatives decreased systemic risk whereas during the crisis increased it. So, credit derivatives seemed to change their role from shock absorbers to shock issuers. This effect is not observed in the other types of derivatives.

Keywords: Systemic risk; derivatives; Shapley value (search for similar items in EconPapers)
JEL-codes: C32 G01 G21 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2012-12-19
New Economics Papers: this item is included in nep-ban and nep-rmg
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http://www.unav.edu/documents/10174/6546776/1356048415_WP_UNAV_21_12.pdf (application/pdf)

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Journal Article: Derivatives holdings and systemic risk in the U.S. banking sector (2014) Downloads
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