The Effect of Bank-Held Derivatives on Credit Accessibility

Posted: 15 Sep 1999

See all articles by Elijah Brewer

Elijah Brewer

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

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance

James T. Moser

American University - Kogod School of Business

Date Written: April 1994

Abstract

Since 1985 commercial banks have become active participants in the interest-rate derivative products markets either as end-users or as intermediaries or as both. Over this same period significant changes were made in the composition of bank portfolios. This paper investigates the relationship between the lending activities of individual banks and their participation in the interest-rate derivative markets. Banks which utilized over-the-counter (OTC) interest-rate swaps experienced greater growth in their commercial and industrial (C&I) loan portfolios than banks which did not use these financial instruments. This result is consistent with the model of Diamond (1984) which predicts that intermediaries' use of derivatives enables increased reliance on their comparative advantage as delegated monitors. Consistent with banks viewing loans and securities as substitutable assets, we also find that securities portfolio growth is negatively related to banks' use of OTC swaps. By contrast, the use of futures is associated with no change in C&I loan growth and a positive change in securities portfolio growth, suggesting futures contracts allow banks to better manage the interest-risk exposures in their securities portfolios.

JEL Classification: G13, G21

Suggested Citation

Brewer, Elijah and Minton, Bernadette A. and Moser, James T., The Effect of Bank-Held Derivatives on Credit Accessibility (April 1994). Available at SSRN: https://ssrn.com/abstract=5324

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

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-3125 (Phone)
614-292-2359 (Fax)

James T. Moser (Contact Author)

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,058
PlumX Metrics