Is Hedging Good or Bad for Bank Holding Companies (BHCs)?

Abstract

We perform a comprehensive analysis of the US banking system during 2007-2013 period by incorporating specific hedging and trading variables, as well as performance measures. We discover that even though hedging might reduce profitability and firm value, it might also minimize tail risks by a reduction in asset volatility. This effect depends on the type of hedging and size of the firm. We also find that speculation in FX markets and equity markets had an impact on performance. Our findings are unique and important for regulators, financial industry, investors, and academia.

Note: The views that I express are my own and do not necessarily represent those of the Federal Reserve Bank of New York or the Federal Reserve System.

Keywords: Hedging, Bank Holding Companies, Regulation, Derivatives

JEL Classification: G14, G18, G21, G28