The likelihood and extent of banks' involvement with interest rate derivatives as end users

Abstract

Based on annual data for medium-sized U.S. commercial banks from 1991 through 1998, we investigate both the decision of whether to participate in interest rate derivatives and, for those banks participating, the extent of their involvement as end users. We find the hedging of balance sheet positions is an important motivation for involvement in derivatives. In addition, the extent of involvement is directly related to a bank's capital position. These results pointing to the typical end user as a financially secure bank seeking to hedge unwanted risk argue against the need for any additional restrictions on derivatives activities.

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