Derivatives usage for banking industry: evidence from the European markets

Abstract

This study investigates the determinants and effects of the use of derivatives in the banking industry, which mainly uses derivatives for trading. Our empirical evidence suggests that banks that use derivatives are associated with higher levels of profitability, lower net interest margin, and more inflows into transaction deposits. We also find that banks’ profitability is significantly and positively related the use of foreign exchange and interest rate derivatives and that banks with high deposits and liquidity are more likely to use foreign exchange derivatives. Finally, we show that derivatives usage increases bank risk and bank value. Our results are robustness to the potential endogeneity issue.