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<p>This study investigates the influence of financial derivatives on bank credit risk, accounting for heterogeneity across derivative types, risk measures, and banking structures. The analysis is based on a panel of 68 large banks from 21 countries over the period from 2010 to 2024 and employs the two-stage instrumental variable (IV) approach. Both accounting-based (Z-score) and market-based (Distance to Default) indicators are measured to capture different dimensions of credit risk. The findings reveal that the effects of derivatives are specific to each instrument on credit risk. Interest rate, equity, and commodity derivatives consistently mitigate credit risk, reinforcing their role as effective hedging tools. Conversely, foreign exchange and credit derivatives display ambiguous or risk-increasing effects, particularly when assessed using market-based measures. Additional evidence suggests that the use of derivatives contributes to higher credit risk in bank holding companies compared to commercial banks, which reflects differences in institutional complexity and risk-taking behavior. These results underscore that derivatives are not inherently stabilizing or destabilizing, highlighting the necessity for regulation that is specific to each instrument and the implementation of comprehensive risk assessment frameworks.</p>

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Derivatives use and credit risk in global banking industry: Does bank specialization matter?

  • 期刊论文

  • 发表日期：

    2026年4月27日

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  • Sheng-Hung Chen,
  • Kieu-Thi Phan,
  • Thi Phuong Chi Nguyen,
  • Ca-Van Pham

摘要

This study investigates the influence of financial derivatives on bank credit risk, accounting for heterogeneity across derivative types, risk measures, and banking structures. The analysis is based on a panel of 68 large banks from 21 countries over the period from 2010 to 2024 and employs the two-stage instrumental variable (IV) approach. Both accounting-based (Z-score) and market-based (Distance to Default) indicators are measured to capture different dimensions of credit risk. The findings reveal that the effects of derivatives are specific to each instrument on credit risk. Interest rate, equity, and commodity derivatives consistently mitigate credit risk, reinforcing their role as effective hedging tools. Conversely, foreign exchange and credit derivatives display ambiguous or risk-increasing effects, particularly when assessed using market-based measures. Additional evidence suggests that the use of derivatives contributes to higher credit risk in bank holding companies compared to commercial banks, which reflects differences in institutional complexity and risk-taking behavior. These results underscore that derivatives are not inherently stabilizing or destabilizing, highlighting the necessity for regulation that is specific to each instrument and the implementation of comprehensive risk assessment frameworks.