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Interest-rate derivatives and bank lending

Author Info

Listed author(s):
  • Brewer III, Elijah
  • Minton, Bernadette A.
  • Moser, James T.
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Abstract

We study the relationship between bank participation in derivatives contracting and bank lending for the period June 30, 1985 through the end of 1992. Since 1985 commercial banks have become active participants in the interest-rate derivative products markets as end-users, or intermediaries, or both. Over much of this period significant changes were made in the composition of bank portfolios. We find that banks which utilized interest-rate derivatives experienced greater growth in their commercial and industrial (C&I) loan portfolios than banks which did not use these financial instruments. This result is consistent with the model of Diamond (1984) which predicts that intermediaries' use of derivatives enables increased reliance on their comparative advantage as delegated monitors.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 24 (2000)
Issue (Month): 3 (March)
Pages: 353-379

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Handle: RePEc:eee:jbfina:v:24:y:2000:i:3:p:353-379
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Gary Gorton & Richard Rosen, 1995. "Banks and Derivatives," NBER Chapters,in: NBER Macroeconomics Annual 1995, Volume 10, pages 299-349 National Bureau of Economic Research, Inc.
  2. Gorton, Gary & Rosen, Richard, 1995. " Corporate Control, Portfolio Choice, and the Decline of Banking," Journal of Finance, American Finance Association, vol. 50(5), pages 1377-1420, December.
  3. Boyd, John H. & Runkle, David E., 1993. "Size and performance of banking firms : Testing the predictions of theory," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 47-67, February.
  4. Elizabeth S. Laderman, 1993. "Determinants of bank versus nonbank competitiveness in short-term business lending," Economic Review, Federal Reserve Bank of San Francisco, pages 17-32.
  5. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
  6. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics,in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
  7. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
  8. Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 5-46, January.
  9. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
  10. René M. Stulz, 1996. "Rethinking Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 8-25.
  11. Elijah Brewer, III & Bernadette A. Minton & James T. Moser, 1994. "The effect of bank-held derivatives on credit accessibility," Working Paper Series, Issues in Financial Regulation 94-5, Federal Reserve Bank of Chicago.
  12. Jeremy C. Stein, 1998. "An Adverse-Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 466-486, Autumn.
  13. Tufano, Peter, 1996. " Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September.
  14. Eric S. Rosengren, 1990. "The case for junk bonds," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 40-49.
  15. Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997. " Why Firms Use Currency Derivatives," Journal of Finance, American Finance Association, vol. 52(4), pages 1323-1354, September.
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