US Banks use of Credit Derivatives

US bank participation in credit derivatives. US banks’ holding of credit derivatives rapidly increased between 1997 and 2007 and started a steady decline after 2011. We used this trend to divide our analysis into three subperiods, pre-financial crisis, during crisis, and post financial crisis. We found that banks are more likely to participate in the credit derivatives market if they were larger, were more experienced in derivatives, held higher risk assets, and had less core capital than others. The results from a more detailed analysis of the three subperiods showed that the financial crisis represented a transitional period for US banks’ holdings of credit derivatives. The results indicate that US banks increased their hedging and increased their appetite for risk. The financial crisis also represented a structural change in type of loans held by participating US banks. The results show that US banks converged towards hedging around the financial crisis and away from speculation in credit derivatives. The increase hedging may allow US banks to increase their appetite for risky assets.