Bank Lending and Interest- Rate Derivatives

Fang Zhao, James Moser
2017 International Journal of Financial Research  
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,
more » ... 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.
doi:10.5430/ijfr.v8n4p23 fatcat:o2xo6igryveo7hdslvqlwmqkzy