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Financial Derivatives at Community Banks

Financial Derivatives at Community Banks. Xuan (Shelly) Shen Quantitative Analyst, Regions Bank Valentina Hartarska Professor, Dept. Ag. Econ. & RS and Dept. of Finance, Auburn University. Key Empirical Findings. During 2003-2012, derivative use was beneficial for community banks.

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Financial Derivatives at Community Banks

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  1. Financial Derivatives atCommunity Banks

    Xuan (Shelly) Shen Quantitative Analyst, Regions Bank ValentinaHartarska Professor, Dept. Ag. Econ. & RS and Dept. of Finance, Auburn University
  2. Key Empirical Findings During 2003-2012, derivative use was beneficial for community banks. If derivatives were banned after 2008, more than half of the roughly 1,100 community banks using derivatives would have reported losses.
  3. Dealer and Credit Derivative Activity Surged at Banks After 2001 Notional Amounts Source: Quarterly Report on Bank Derivatives Activities, OCC
  4. Ever More Community Banks Used Derivatives After 2005 Assets: Source: Quarterly Banking Profile, FDIC
  5. Derivative Activity at Community Banks by Lending Specialty Source: Call Reports, FDIC
  6. Community Bank Derivative Users Are Larger and Make More Loans Source: Call Reports, FDIC
  7. Community Bank Derivative Users Have Less Interest Rate Risk but More Liquidity Risk Source: Call Reports, FDIC
  8. Community Bank Profitability and Losses by Lending Specialty and by Derivative User/Non-User
  9. Method Estimate impact of risk on ROA for derivative user and non-user community banks. Use endogenous switching model to control for banks’ endogenous choice to use derivatives in ROA estimation and compute the counterfactual effects .
  10. Community Bank Profitability by Lending Specialty: Risk Factors Affect Derivative Users and Non-Users Differently *** p<0.01, ** p<0.05, * p<0.1
  11. Community Bank Profitability by Lending Specialty: Risk Factors Affect Derivative Users and Non-Users Differently *** p<0.01, ** p<0.05, * p<0.1
  12. Community Bank Derivative Users Would Have Reported Losses if Not Using Derivatives *** p<0.01, ** p<0.05, * p<0.1
  13. Profitability of Community Bank Non-Derivative Users Would Be Higher if Using Derivatives *** p<0.01, ** p<0.05, * p<0.1
  14. Conclusions Derivatives increased, rather than lowered, profitability for the majority of community banks over the period 2003-2012. Prohibiting the use of derivatives would have made some community banks more vulnerable to interest rate risk and credit risk. While derivatives like any financial instrument can be misused, evidence shows benefits for community banks.
  15. Thank You Questions and Comments
  16. Classification of Community Banks Source: FDIC Note: All specialty groups require the bank to hold loans greater than 33% of total assets. *retail loans include 1-4 family residential real estate loans and loans to individual. **commercial loans include CRE loans and C&I loans.
  17. Determinants of Bank Decisions to Use Derivatives *** p<0.01, ** p<0.05, * p<0.1
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