Derivative use, ownership structure and lending activities of US banks
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Derivative use, ownership structure and lending activities of US banks Benjamin A. Abugri 1
& Theophilus
T. Osah 2
Accepted: 22 October 2020 / Published online: 16 November 2020 # Academy of Economics and Finance 2020
Abstract Following the 2007–2008 financial crisis, there is widespread interest in understanding how derivative use drives bank lending behavior. Our paper examines the impact of bank ownership structure on the relationship between derivative use and lending activities of U.S. banks. We find that lending recovered faster in larger banks than smaller banks post-crisis and in line with Diamond’s (Diamond DW 1984 Financial intermediation and delegated monitoring. Rev Econ Stud 51:393– 414) systemic risk reduction theory, derivative use is positively associated with lending growth. Ownership is significant in explaining the magnitude of the relationship even after controlling for alternative specifications of the derivative use variable. In both normal and crisis periods, the speed of adjustment of lending to derivatives use by stock banks lags that of mutual banks. We suggest that speculative trading in derivatives substitutes for lending growth to a larger extent for stock banks compared to mutual banks. These findings may have important implications for investors and bank regulators. Keywords Commercial banks . Derivative use . Ownership structure . Bank lending .
Dynamic GMM method JEL classification G21. G32
* Benjamin A. Abugri [email protected] Theophilus T. Osah [email protected]
1
School of Business, Southern Connecticut State University, New Haven, CT, USA
2
Robert C. Vackar College of Business and Entrepreneurship, University of Texas Rio Grande Valley, Edinburg, TX, USA
Journal of Economics and Finance (2021) 45:146–170
147
1 Introduction In this paper we examine the impact of bank ownership structure on the relationship between derivative use and lending activities of U.S. banks. Interest in derivative use and its impact on economic activities heightened in the post 2007–2008 crisis period, and anecdotal evidence suggests that derivative use was a key driver of the crisis. Gorton (2008) attributes the financial panic to the opaque nature of derivatives while Paletta and Patterson (2010) point to banks’ use of derivatives predominately for potentially lucrative trading, as fueling the economic turmoil. Despite numerous studies on bank risk-taking and risk management, research on banks’ speculative trading in derivatives is limited. Geczy et al. (2007) suggest that balance sheets of companies are not adequate in identifying speculation. Thus, some studies for other industries, identify companies as speculators either through surveys (Geczy et al. 2007) or through indirect proxies for speculation (Beber and Fabbri 2012). On the role of ownership on lending growth, many studies have shown that ownership structure of firms can explain the activities managers and owners undertake (Fama and Jensen 1983a, b; Smith and Stutzer 1990; Mayers and Smith 1992; Doherty and Dionne
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