Banking Risk and Credit Derivatives

Abstract

Recently, global credit derivative markets have expanded very fast. Despite the fast growth, little is known whether their use is beneficial or increases their risk exposure. The few empirical papers that exist in this area relate primarily to the American market and there are no works referred to the European banking sector. Our results show that European banks that use credit derivatives for hedging experience an improvement in their level of financial stability, while those who opt for a speculative position have test negative. This conclusion is in line with Shao and Yeager (2007). On the other hand, contrary to established by these authors, is not observed entities exploit coverage to undertake more risky strategies, both in terms of leverage of portfolio that ultimately increase financial instability in terms of z-score. Accordingly and based on these data, it could not be attributed to credit derivatives in Europe the direct cause of the current crisis.