Interest-Rate Uncertainty, Derivatives Usage, and Loan Growth in Bank Holding Companies
29 Pages Posted: 22 Oct 2014
Date Written: October 2, 2014
We explore one channel through which interest-rate derivatives usage affects loan growth positively in bank holding companies (BHCs). If interest-rate derivatives usage allows a BHC to substitute more freely among sources of funds, then its reliance on less interest-rate-sensitive sources such as core deposits should be lower. We test the hypothesis that if BHCs use interest-rate derivatives to reduce the adverse effects of interest-rate uncertainty on lending, then their loan growth should be less sensitive to core deposit growth. We find that loan growth is less sensitive to core deposit growth for interest-rate derivatives users than for non-users and that this sensitivity is lower when the extent of derivatives usage is higher. One important implication is that the funding flexibility enjoyed by BHCs using interest-rate derivatives should allow these BHCs to provide a smoother and higher level of intermediation, leading to more stable loan growth and greater economic stability.
Keywords: Interest-rate uncertainty, interest-rate derivatives usage, loan growth, financial stability
JEL Classification: G21, G32
Suggested Citation: Suggested Citation