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Derivatives Holdings and Systemic Risk in the U.S. Banking Sector

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Author Info

  • María Rodríguez-Moreno

    ()
    (European Central Bank)

  • Sergio Mayordomo

    ()
    (School of Economics and Business Administration, University of Navarra)

  • Juan Ignacio Peña

    ()
    (Department of Business Administration, Universidad Carlos III de Madrid)

Abstract

This paper studies the impact of the banks’ portfolio holdings of financial derivatives on the banks’ individual contribution to systemic risk over and above the effect of variables related to size, interconnectedness, substitutability, and other balance sheet information. Using a sample of 91 U.S. bank holding companies from 2002 to 2011, we compare five measures of the banks’ contribution to systemic risk and find that the new measure proposed in this study, Net Shapley Value, outperforms the others. Using this measure we find that the banks’ holdings of foreign exchange and credit derivatives increase the banks contributions to systemic risk whereas holdings of interest rate derivatives decrease it. Nevertheless, the proportion of non-performing loans over total loans and the leverage ratio have much stronger impact on systemic risk than derivatives holdings. We find that before the subprime crisis credit derivatives decreased systemic risk whereas during the crisis increased it. So, credit derivatives seemed to change their role from shock absorbers to shock issuers. This effect is not observed in the other types of derivatives.

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File URL: http://www.unav.es/facultad/econom/files/workingpapersmodule/@random50169a3d22927/1356048415_WP_UNAV_21_12.pdf
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Bibliographic Info

Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 21/12.

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Length: 45 pages
Date of creation: 21 Dec 2012
Date of revision:
Handle: RePEc:una:unccee:wp2112

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Web page: http://www.unav.es/facultad/econom

Related research

Keywords: Systemic risk; derivatives; Shapley value;

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Cited by:
  1. Mayordomo, Sergio & Rodriguez-Moreno, Maria & Peña, Juan Ignacio, 2014. "Liquidity commonalities in the corporate CDS market around the 2007–2012 financial crisis," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 171-192.

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