Determinants of Credit Risk Derivatives Use by the European Banking Industry

Journal of Money, Investment and Banking, Issue 25, September 2012

23 Pages Posted: 16 Mar 2015

See all articles by Luis Otero González

Luis Otero González

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies

Luis Ignacio Rodriguez Gil

Universidad de Santiago de Compostela - Faculty of Economic Science and Business Studies

Sara Fernandez Lopez

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies

Milagros Vivel Búa

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies

Date Written: March 15, 2015

Abstract

Recently, global credit derivative markets have expanded very fast. The banking sector is a major user of this type of product. We intend to study the reasons why European banks use credit derivatives, analyzing to what extent the use of credit derivatives can be predicted using hedging theories. The data have been obtained from the information provided in annual reports and the Pillar 3 disclosures report. We performed the probit model estimation using panel data methodology. Our results show that the use of credit derivatives is consistent in most cases with the predictions of hedging theories. The likelihood of using credit derivatives is positively related to the bank’s size, distress costs and to the use of other derivatives, and negatively related to the bank’s Tier I risk capital and the level of credit risk. In addition, the aggregate analysis of exposures of European banks shows the predominance of net buying positions, unlike the American case, where the opposite occurs. This would mean that net risk exposure to these products is less for the European banking industry. Furthermore, the fact that the volume of contracts represents a very small percentage of the balance sheet suggests that the systemic risk inherent in this product is limited.

Keywords: Banking sector, credit derivatives, hedging theories.

JEL Classification: G21

Suggested Citation

Otero González, Luis and Rodriguez Gil, Luis Ignacio and Fernandez Lopez, Sara and Vivel Búa, Milagros, Determinants of Credit Risk Derivatives Use by the European Banking Industry (March 15, 2015). Journal of Money, Investment and Banking, Issue 25, September 2012. Available at SSRN: https://ssrn.com/abstract=2578516

Luis Otero González

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies ( email )

Avda. Juan XXIII s/n
Santiago, A Coruña 15704
Spain

Luis Ignacio Rodriguez Gil (Contact Author)

Universidad de Santiago de Compostela - Faculty of Economic Science and Business Studies ( email )

Avda. Burgo das Nacions s/n
Santiago de Compostela, A Coruña 15704
Spain

Sara Fernandez Lopez

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies ( email )

Avda. Juan XXIII s/n
Santiago, A Coruña 15704
Spain

Milagros Vivel Búa

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies ( email )

Avda. Juan XXIII s/n
Santiago, A Coruña 15704
Spain
981 563100 Ext.11606 (Phone)

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