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Why do banks use derivatives? An analysis of the Italian banking system

Author

Listed:
  • Luigi Infante

    (Bank of Italy)

  • Stefano Piermattei

    (Bank of Italy)

  • Raffaele Santioni

    (Bank of Italy)

  • Bianca Sorvillo

    (Bank of Italy)

Abstract

The derivatives market has experienced quick growth all over the world in the last two decades. Banks decide to participate in the derivatives market either to hedge against unexpected movements in economic variables or for trading and broker-dealer activities. This paper analyses, by means of multivariate descriptive statistical tools, the determinants of Italian banks� use of derivatives over a long time horizon (2003-2017) by using quarterly Bank of Italy supervisory data. We find that size and being part of a banking group positively affect banks� use of derivatives. Moreover, banks mainly employ derivatives for hedging purposes, especially to hedge against interest rate and credit risks. Finally, derivatives represent a hedging alternative to capital and liquidity. Our results are robust to different specifications that take into account the classification of derivatives by purpose (hedging versus trading) and the distinction between dealer versus end-user banks.

Suggested Citation

  • Luigi Infante & Stefano Piermattei & Raffaele Santioni & Bianca Sorvillo, 2018. "Why do banks use derivatives? An analysis of the Italian banking system," Questioni di Economia e Finanza (Occasional Papers) 441, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_441_18
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2018-0441/QEF_441_18.pdf
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    References listed on IDEAS

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    Cited by:

    1. Lannoo, Karel & Thomadakis, Apostolos, 2020. "Derivatives in Sustainable Finance," ECMI Papers 29791, Centre for European Policy Studies.
    2. Gregoriou, Greg N. & Racicot, François-Éric & Théoret, Raymond, 2021. "The response of hedge fund tail risk to macroeconomic shocks: A nonlinear VAR approach," Economic Modelling, Elsevier, vol. 94(C), pages 843-872.

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    More about this item

    Keywords

    banking; derivatives; financial risks; hedging;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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