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Derivatives in the wake of disintermediation: a simultaneous equations model of commercial and industrial lending and the use of derivatives by US banks

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  • Dawood Ashraf
  • John Goddard

Abstract

Before the financial crisis of 2007-2009, the search for new revenue and profit streams by US banks contributed to a long-term trend towards disintermediation. Trading in derivatives might offer an alternative to traditional deposit-taking and lending business as a source of revenue and profit; or it might enable banks to increase their lending more rapidly, through improved risk management. A simultaneous equations model is developed for the growth in commercial and industrial lending, and the use of derivatives. Lending by derivatives users grew more slowly on average, and the likelihood of using derivatives was inversely related to the growth of lending. This suggests the use of derivatives was a substitute for traditional lending business. Dealing in derivatives creates new forms of systemic risk through complex and opaque patterns of exposure. The empirical results suggest a continuing need for careful regulatory oversight, and more transparent disclosure of banks' derivatives exposures.

Suggested Citation

  • Dawood Ashraf & John Goddard, 2012. "Derivatives in the wake of disintermediation: a simultaneous equations model of commercial and industrial lending and the use of derivatives by US banks," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 4(3), pages 250-271.
    • Handle: RePEc:ids:injbaf:v:4:y:2012:i:3:p:250-271
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    Citations

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    Cited by:

    1. Ashraf, Dawood & Mohammad, Nazeeruddin, 2014. "Matching perception with the reality—Performance of Islamic equity investments," Pacific-Basin Finance Journal, Elsevier, vol. 28(C), pages 175-189.
    2. Muhammad Suhail Rizwan & Asifa Obaid & Dawood Ashraf, 2017. "The Impact of Corporate Social Responsibility on Default Risk: Empirical evidence from US Firms," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 9(3), pages 36-70, September.
    3. Mohammad, Nazeeruddin & Ashraf, Dawood, 2015. "The market timing ability and return performance of Islamic equities: An empirical study," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 169-183.
    4. Ashraf, Dawood & Rizwan, Muhammad Suhail & L’Huillier, Barbara, 2016. "A net stable funding ratio for Islamic banks and its impact on financial stability: An international investigation," Journal of Financial Stability, Elsevier, vol. 25(C), pages 47-57.
    5. Samar Jameel Kalyal & Dawood Ashraf & Asfia Obaid, 2019. "The Role of Stability and Ownership Structure in Determining the Efficiency of US Bank Holding Companies," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 11(2), pages 19-44, June.
    6. Ashraf, Dawood & Ramady, Mohamed & Albinali, Khalid, 2016. "Financial fragility of banks, ownership structure and income diversification: Empirical evidence from the GCC region," Research in International Business and Finance, Elsevier, vol. 38(C), pages 56-68.
    7. Dwumfour, Richard Adjei, 2017. "Explaining banking stability in Sub-Saharan Africa," Research in International Business and Finance, Elsevier, vol. 41(C), pages 260-279.
    8. Muhammad Suhail Rizwan & Muhammad Moinuddin & Barbara L’Huillier & Dawood Ashraf, 2018. "Does a one-size-fits-all approach to financial regulations alleviate default risk? The case of dual banking systems," Journal of Regulatory Economics, Springer, vol. 53(1), pages 37-74, February.
    9. Ali, Abdelrahman Elzahi Saaid, 2016. "Poverty Alleviation through Microfinance in North-East Kenya Province," Working Papers 2016-9, The Islamic Research and Teaching Institute (IRTI).

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