Interest-Rate Uncertainty, Derivatives Usage, and Loan Growth in Bank Holding Companies

29 Pages Posted: 22 Oct 2014

See all articles by Elijah Brewer

Elijah Brewer

DePaul University - Department of Finance; Federal Reserve Bank of Chicago

Sanjay Deshmukh

DePaul University - Department of Finance

Timothy Opiela

DePaul University

Date Written: October 2, 2014

Abstract

We explore one channel through which interest-rate derivatives usage affects loan growth positively in bank holding companies (BHCs). If interest-rate derivatives usage allows a BHC to substitute more freely among sources of funds, then its reliance on less interest-rate-sensitive sources such as core deposits should be lower. We test the hypothesis that if BHCs use interest-rate derivatives to reduce the adverse effects of interest-rate uncertainty on lending, then their loan growth should be less sensitive to core deposit growth. We find that loan growth is less sensitive to core deposit growth for interest-rate derivatives users than for non-users and that this sensitivity is lower when the extent of derivatives usage is higher. One important implication is that the funding flexibility enjoyed by BHCs using interest-rate derivatives should allow these BHCs to provide a smoother and higher level of intermediation, leading to more stable loan growth and greater economic stability.

Keywords: Interest-rate uncertainty, interest-rate derivatives usage, loan growth, financial stability

JEL Classification: G21, G32

Suggested Citation

Brewer, Elijah and Deshmukh, Sanjay and Opiela, Timothy, Interest-Rate Uncertainty, Derivatives Usage, and Loan Growth in Bank Holding Companies (October 2, 2014). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2512478

Elijah Brewer

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Sanjay Deshmukh (Contact Author)

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-8472 (Phone)
312-362-6566 (Fax)

Timothy Opiela

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

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