Two Essays on the Usage of Financial Derivative for Commercial Banks: Evidence from European Market

• Main Authors: Yu-Jen Hsiao, 蕭育仁
• Other Authors: Keng-Yu Ho
• Format: Others
• Language: en_US
• Published: 2010
• Online Access: http://ndltd.ncl.edu.tw/handle/87118323910635990811

博士 === 國立中央大學 === 財務金融研究所 === 98 === This dissertation contains two chapters on the usage of financial derivative for commercial banks: evidence from European market. Chapter 1: On the Usage of Financial Derivative for Commercial Banks: Evidence from European Markets This chapter investigates the financial characteristics of banks and country-level variables that use financial derivatives and those that do not. We find that user banks, compared to nonusers are associated with large size, higher profitability, lower intermediation profit, higher interest-rate risk and corporate loan, higher deposit ratio and dividend payout ratio, diversified ownership structure and less liquid derivatives markets. We also find that banks, especially smaller ones, benefit from being associated with bank-holding companies. Besides, we further consider that how can the change in a bank''s financial derivatives holding be explained? We find that the increase in the firm size and capital adequacy and decrease in the deposit ratio appear to significantly increase the likelihood of banks to use financial derivatives. The strong results from our tests are consistent with some theoretical predictions, but in several cases unambiguously inconsistent. We interpret this as evidence that commonly cited theoretical motivations for risk management are of secondary importance for determining which banks use financial derivatives. Instead, the results are most consistent with an alternative hypothesis that derivatives are financial tools for trading. Chapter 2: The Effect of Financial Derivative Usage on Commercial Banks Risk and Value: Evidence from European Markets This chapter empirically investigates two questions. First, we investigate whether the level of financial derivative activities of European banks is associated with the market’s perception of their interest rate and exchange rate risks. The results suggest that the use of interest arte derivatives does seem to increase European banks’ interest arte risk. A possible explanation for this finding is that banks may use financial derivatives to speculate interest rate risk changes or bank’s derivative trading activities may have exposed them to interest rate risk changes that are not effectively hedged. Further investigation revealed that the use of financial derivatives for hedging does seem to decrease European banks’ risk, supporting the argument that banks are more likely to speculate with financial derivatives. However, there is no significant evidence that banks financial derivatives are associated with foreign exchange exposure. Second, using Tobin’s Q as an approximation for bank market value, we find significant evidence that the use of financial derivatives is positively associated with bank market value. Specially, we find trading purpose for banks mainly causes an increase in bank value, this differ from theories that suggest the decision to hedge is value increasing by non-financial firms. If such a finding is shown to be robust across follow-up studies, it would suggest the need for better management of banks’ internal control system and /or greater derivative disclosure to impose market discipline on banks to ensure that there is no unwarranted risk taking.