Do Financial Derivatives Reduce the Risk of Commercial Banks?——Empirical Research Based on the Banking Industry in China
Financial derivatives have now evolved into an important tool for commercial banks to manage risk and bol-ster revenue.However,these instruments carry high operational and speculative risks.Unlike non-financial institutions,the de-rivative business of banking financial institutions integrates activities such as"hedging""speculation"and"agency",which are characterized by greater economic and accounting complexity.How to use financial derivatives to strengthen risk management is a major problem that commercial banks are facing and urgently need to solve.This research focuses on the banking financial institutions in China from 2010 to 2021.Empirical evidence indicates that commercial banks can significantly reduce their risk by using financial derivatives,with interest rate and foreign exchange de-rivatives being particularly effective for risk management.Our investigation reveals that derivatives mitigate risk by decreasing the volatility of net interest income and the ratio of non-performing loans.Specifically,when used for"hedging",derivatives can reduce both interest rate and exchange rate risks,thereby stabilizing net interest income.Developing"agency"derivatives businesses can gather more customer information,decrease information asymmetry,diminish credit risk and enhancing opera-tional stability.Further research concludes that the role of financial derivatives in reducing bank risks is more pronounced when commercial banks have higher information transparency and when the external environment is more market oriented.Commercial banks that use derivatives exhibit greater operational stability under the influences of reforms like interest rate mar-ketization and exchange rate formation mechanisms.This study,based on the regulatory system for derivatives in China and the distinct features of commercial banks'deriva-tive operations,explores the impact of financial derivatives on risk management.It not only enriches the existing body of litera-ture on commercial banks'risk management but also provides strategic guidance for commercial banks,helping them to use de-rivatives judiciously and to effectively prevent risks.More importantly,this study serves as a reference for supervision depart-ments in regulating the derivatives business of commercial banks.
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