Impact of Derivative Portfolios on Bank Stability

Economic uncertainties impede the progress of a nation, whereas financial system stability fosters its growth. The paper analyses the impact of derivative portfolios on bank stability. The study uncovers evidences that Indian commercial banks reporting high total assets and high capital adequacy ratio and low non-performing assets exhibit the usage of derivatives. Higher credit risk induces banks to hedge their risk exposure. Derivatives hedged are found to foster bank stability than derivative trading. The Difference in Difference (DID) estimate model empirically validates the impact of interest rate derivatives used for hedging in strengthening the stability of banks. Robustness test using market returns confirms the impact of derivative use by banks in strengthening stability