The Likelihood and Extent of Bank Participation in Derivatives Activities

Based on annual U.S. bank data covering the period from 1991 through 1994, we use a variant of Cragg's model to investigate empirically both the decision of whether to participate in derivatives activities and, for banks involved in derivatives, the extent of their participation. The results reveal major differences between the determinants of banks' participation in derivatives activities and the factors influencing the extent of their participation. In particular, while not influencing significantly the decision of whether to use derivatives, capitalization is found to enhance the extent of derivatives participation. This finding supports the view that capital regulation effectively ties the extent of derivatives participation to capital adequacy