Derivatives Holdings and Systemic Risk in the U.S. Banking Sector

TL;DR

This paper examines how different types of derivatives holdings influence systemic risk in U.S. banks, highlighting the roles of foreign exchange, credit, and interest rate derivatives, along with loan quality and leverage.

Contribution

It provides an empirical analysis of the differential impacts of various derivatives on systemic risk, emphasizing the importance of loan quality and leverage ratios.

Findings

Foreign exchange and credit derivatives increase systemic risk

Interest rate derivatives decrease systemic risk

Loan quality and leverage have stronger impacts than derivatives

Abstract

Foreign exchange and credit derivatives increase the bank's contributions to systemic risk. Interest rate derivatives decrease it. The proportion of non-performing loans over total loans and the leverage ratio have stronger impact on systemic risk than derivatives holdings.