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?
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.
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.
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.
The authors thank the discussant and participants at the 9th EBES Conference, the 3rd International Conference of the Financial Engineering and Banking Society (FEBS), the 2013 5th International IFABS Conference and the 20th Annual Conference of the Multinational Finance Society (MFS) for their useful comments on earlier versions of this paper. Any errors in the manuscript are those of the authors. The authors thank Vincenzo Trichilo for his help in collecting data.
This is an invited paper that was reviewed by the Guest Editor.
Broccardo, E., Mazzuca, M. and Yaldiz, E. (2014), "The use and determinants of credit derivatives in Italian banks", Journal of Risk Finance, Vol. 15 No. 4, pp. 417-436. https://doi.org/10.1108/JRF-04-2014-0038Download as .RIS
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