The use and determinants of credit derivatives in Italian banks

Purpose - This paper aims to answer the following research questions: To what extent do banks use credit derivatives (CDs)? What are the differences between users and non-users? What are the main underlying motivations? Design/methodology/approach - The annual reports of 112 Italian banks are analys...

Full description

Saved in:
Bibliographic Details
Published in:The journal of risk finance 2014-01, Vol.15 (4), p.417-436
Main Authors: Broccardo, Eleonora, Mazzuca, Maria, Yaldiz, Elmas
Format: Article
Language:English
Subjects:
Annual reports
Bank acquisitions & mergers
Banking industry
Banks
Credit risk
Derivatives
Determinants
Economic crisis
Finance
Gain
Hedging
Incentives
International finance
Loans
Over the counter trading
Regression
Retail banking
Risk management
Studies
Variables
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Purpose - This paper aims to answer the following research questions: To what extent do banks use credit derivatives (CDs)? What are the differences between users and non-users? What are the main underlying motivations? Design/methodology/approach - The annual reports of 112 Italian banks are analysed during the 2005-2011 period. By estimating a probit regression model, two incentives for using CD are tested: managing credit risk, and increasing a bank's income composition/diversification. Different sub-samples are considered. The motivations are further investigated to understand whether they vary before and after the crisis. Findings - A limited number of banks use CD and larger and listed banks are more likely to do so. The results do not support the hedging hypothesis. Signals pointing towards the financial distress hypothesis emerge. Less capitalised banks are more likely to use CD. For listed banks, the findings support the hypothesis that economies of scale exist. After the financial crisis, a number of determinants tend to gain significance, and a speculative driver emerges. Originality/value - Previous studies focus primarily on the USA, and single-country studies do not exist in the literature. Given the importance of risk management that the crisis has reinforced, investigating whether CD use has changed before and after the crisis is of interest. Given the incompleteness of the information on CDs, the paper contributes to increasing the available information on CDs by hand-collecting data from banks' financial statements.
ISSN:1526-5943
2331-2947
DOI:10.1108/JRF-04-2014-0038