The Risks of Off-Balance Sheet Derivatives in U.S. Commercial Banks

Abstract:     
This paper aims to test the extent to which the tax regulatory and discipline hypotheses determine derivative activities of U.S. commercial banks for period starting 1992 through 2008. We employ Mansfield’s (1961) logistic diffusion model and we consider derivative activities as real financial innovation following trend diffusion curve. The model is modified to include regulator, non-regulatory/specific factors and macroeconomic factors. The results reveal that derivative activities are real financial innovations that are increasing over time. Another major finding the regulatory tax hypothesis is not a major factor in determining derivative activities U.S. commercial banks. The results also suggest that derivatives activities do not business cycle and economic conditions. However, derivatives are prevalently used where economies of scale is a viable outcome since they require highly specialized qualified staff and are more likely available to large banks. The substitution effect dominant between derivatives and loan ratio factor. Diminishing credibility of the will reduce derivatives activities. While derivatives are more likely to be an innovation, they are also determined by other factors such as technology and learning.

Number of Pages in PDF File: 28

Keywords: Off-balance sheet, OBS, banks risk, risk managment, Derivatives

JEL Classification: G21, G28, E44

working papers series