Who's Capitalizing on Derivatives?

FINANCIAL INDUSTRY STUDIES, July 1995

Posted: 23 Aug 1998

See all articles by Jeffery Gunther

Jeffery Gunther

Federal Reserve Banks - Federal Reserve Bank of Dallas

Thomas F. Siems

Federal Reserve Bank of Dallas - Research Department

Abstract

Are banks using derivatives to hedge financial risks or to make speculative gambles? While data are not available to answer this question fully and directly, the relationship between bank capital and derivatives activities may provide an important clue. This study provides evidence that those banks with the highest capital cushion with which to absorb losses and potentially the lowest risk-taking incentives are the ones with the highest derivatives participation. This finding is consistent with the view that either financially strong institutions are using derivatives to hedge, or regulatory and market discipline have made higher capital levels a prerequisite for derivatives activities. Either way, a positive relationship between derivatives activities and capitalization should help ease concerns regarding bank derivatives activities.

JEL Classification: G21, G28

Suggested Citation

Gunther, Jeffery and Siems, Thomas F., Who's Capitalizing on Derivatives?. FINANCIAL INDUSTRY STUDIES, July 1995, Available at SSRN: https://ssrn.com/abstract=6876

Jeffery Gunther

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Thomas F. Siems (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

2200 N. Pearl Street
Dallas, TX 75201
United States
214-922-5129 (Phone)
214-922-6076 (Fax)

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