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AN EMPIRICAL ANALYSIS OF THE USE OF DERIVATIVES BY BANKS IN BRAZIL, CHILE, AND MEXICO

Andres Rivas

Texas A&M International University, USA.

Felice Policastro

Gardner-Webb University, USA.

Teofilo Ozuna

The University of Texas-Pan American, USA.

ABSTRACT

The purpose of this study is to investigate the financial characteristics that might influence the use of derivatives by banks in Latin America. We find that in Latin America banks using derivatives, compared to nonuser banks, are associated with riskier capital structures. Additionally, we find that on-balance sheet activities such as liquidity is not a substitute for derivatives and that derivatives are not being used to coordinate interest-rate risk and credit risk management strategies. These results identifying a derivative user bank as a weak capitalized bank, which does not seek to hedge unwanted risk, argue the need for any additional restrictions on derivatives activities. Latin American policy makers need to address the possible speculative behavior of banks in Latin America, otherwise they risk having an unstable and detrimental banking system.

Keywords: Derivatives, Banking, Risk Management, Latin America

JEL classification: G21, G28, G32