Uses And Motivations For Credit Derivatives: An Empirical Investigation Into Italian Banks

This study examines the extent to which Italian banks use credit derivatives (CD), whether there are differences between users and nonusers, and the underlying motivations for the use of CD. The results show that a limited number of credit institutions use CD, and that this usage varies over time (2007 seems to be a peak year). Differences exist between users and nonusers (with reference to the risk and capitalization, attitude in hedging, and profitability, and the fact that users tend to be larger, listed and commercial banks). To test the determinants of CD use, we identify two main incentives: managing credit risk, and increasing the bank’s income diversification. The results seem not to support the hedging hypothesis, and signals emerge for the fact that users employ CD for different/speculative purposes. The findings seem to indicate a direct relationship between the probability of using CD and the banks’ financial distress costs. The probability of using CD increases in the case of larger and listed banks. The findings regarding the separate estimates for small/large banks and for listed/unlisted banks show that the probability of using CD varies when different sub-samples are considered. Finally, relevant differences emerge between the pre- and post-crisis period.