Alligators in the Swamp: The Impact of Derivatives on the Financial Performance of Depository Institutions

J. OF MONEY, CREDIT, AND BANKING, Vol. 28 No. 3, August 1996

Posted: 19 May 1998

See all articles by Elijah Brewer

Elijah Brewer

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

William E. Jackson

Culverhouse College of Business, University of Alabama

James T. Moser

American University - Kogod School of Business

Abstract

It has been argued that underpriced federal deposit insurance provides incentives for insured institutions to increase the value of shareholder equity by expanding into activities that shift risk onto the deposit insurer. Derivative instruments have been used by firms to change their risk exposure. Permitting firms with substantial moral hazard incentives to utilize interest-rate derivative instruments could lead to higher rather than lower exposure to risk. This article, using a sample of savings and loan associations (S&Ls), examines the proposition that involvement with interest-rate derivative instruments increases depository institutions' risk. We find that there is a negative correlation between risk and derivatives usage. In addition, S&Ls that used derivatives experienced relatively greater growth in their fixed-rate mortgage portfolios.

JEL Classification: G21, G28, G11

Suggested Citation

Brewer, Elijah and Jackson, William E. and Moser, James T., Alligators in the Swamp: The Impact of Derivatives on the Financial Performance of Depository Institutions. J. OF MONEY, CREDIT, AND BANKING, Vol. 28 No. 3, August 1996. Available at SSRN: https://ssrn.com/abstract=7521

Elijah Brewer (Contact Author)

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

William E. Jackson

Culverhouse College of Business, University of Alabama ( email )

Tuscaloosa, AL 35487-0225
United States
205.348.6217 (Phone)
205.348.6695 (Fax)

James T. Moser

American University - Kogod School of Business ( email )

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

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