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The effect of financial innovation on European banks' risk

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  • González, Luís Otero
  • Rodríguez Gil, Luís Ignacio
  • Martorell Cunill, Onofre
  • Merigó Lindahl, José M.

Abstract

This study examines the effect of the use of securitization and credit derivatives on the risk profile of European banks. Using information from 134 listed European banks during the period of 2006–2010, the results show that securitization and trading with credit derivatives have a negative effect on financial stability. The main findings also show the dominance of trading positions over hedging positions for credit derivatives. The results of this study support the higher capital requirements of the new Basel III international banking regulations. Furthermore, accounting measures do not readily indicate market risks, and thus the results support central banks' use of market-solvency measures to monitor financial stability.

Suggested Citation

  • González, Luís Otero & Rodríguez Gil, Luís Ignacio & Martorell Cunill, Onofre & Merigó Lindahl, José M., 2016. "The effect of financial innovation on European banks' risk," Journal of Business Research, Elsevier, vol. 69(11), pages 4781-4786.
    • Handle: RePEc:eee:jbrese:v:69:y:2016:i:11:p:4781-4786
    DOI: 10.1016/j.jbusres.2016.04.030
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