Interest-rate uncertainty, derivatives usage, and loan growth in bank holding companies

• Published in: Journal of financial stability 2014-12, Vol.15, p.230-240
• Main Authors: Brewer, Elijah, Deshmukh, Sanjay, Opiela, Timothy P.
• Format: Article
• Language: English
• Subjects: Financial stability; Interest-rate derivatives usage; Interest-rate uncertainty; Loan growth
• ISSN: 1572-3089; 1878-0962
• DOI: 10.1016/j.jfs.2014.10.003

•Explore the effect of interest-rate derivatives usage on loan growth.•Examine whether usage affects the impact of interest-rate uncertainty on lending.•Test whether usage reduces reliance on less interest-rate-sensitive funds.•Loan growth of derivatives users is less sensitive to core deposit growth.•Usage provides funding flexibility, leading to lending/economic stability. 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.