Are Italian Banks Profitable by using Derivatives? Evidence from the Recent Recession of Italian Economy

Abstract

The collapse of Italian economy has coincided with the global financial crisis to which derivatives are suspected to be responsible of its propagation. For this reason, this study aims to examine whether the use of derivatives affects the profitability of Italian banks during both the global financial crisis period and the recession period of Italian economy. To reach this goal an appropriate econometric procedure namely the dynamic Generalized Method of Moments system is applied using data from 22 Italian banks over the long period 2005–2017. A series of bank-specific indicators are used to explain the effect of overall derivatives and each derivative instrument separately on Italian banks’ profitability. The results of regressions panels indicate that in general derivatives as well as measured in the whole or splitting up in instruments specifically in forwards, options, and, in particular, swaps affect positively the profitability of Italian banks. The main conclusion is that – despite the episode of economic recession in Italy – Italian banks boost their profitability by using derivatives.

As practical contribution, policy-makers in Italy should throw out the assumption of the implication of derivatives in the fragility of the banking system. On the contrary, they should pave the way easily for Italian banks’ managers to deal with derivatives and look out for the real problems of the recent collapse of the Italian economy.

Citation

Keffala, M.R. (2019), "Are Italian Banks Profitable by using Derivatives? Evidence from the Recent Recession of Italian Economy", Biswas, R. and Michaelides, M. (Ed.) Essays in Financial Economics (Research in Finance, Vol. 35), Emerald Publishing Limited, Leeds, pp. 119-143. https://doi.org/10.1108/S0196-382120190000035006