The effects of usage of derivatives products on bank risk and performance: Evidence from emerging and developing countries

Financial derivatives are instruments that increase the efficiency of over the counter and capital markets and tools use for hedging, speculation, and arbitrage purpose. Banks use financial derivatives to protect themselves against risk and uncertainty and to gain revenue beyond that available from traditional bank operations. It has been observed that the studies conducted in the literature have mainly tested the effect of using derivatives on bank risk and performance in developed countries, whereas this relationship has not been investigated or examined in developing or transition countries. In this direction, the effects of derivatives use on bank risk and performance in transition and developing countries have been investigated in this thesis. For this purpose, two samples were created by using the data obtained from the annual balance sheet and income statement data of banks that use derivatives and operate in transition and developing countries over the period 2011-2018. The first sample consists of 50 banks operating in 8 transition countries. The second sample consists of 181 banks operating in 21 developing countries. In the study, Panel data regression analysis was used for analyzing the data obtained from the banks' balance sheet and income statement. Even though there are similarities and differences in the results in both samples, it has been determined that financial derivatives uses have an effect on bank risk and performance in both samples. According to the results, it was found that there is a negative and statistically significant relationship between the Z score, which represents bank risk, and the use of derivatives products in the sample of transition countries, and that the use of derivatives reduces the risk of banks. In the sample of developing countries, the relationship is positive and the use of derivatives increases the risk of banks. In both samples, no relationship was found between the profitability of assets, which represents bank performance, and the use of derivative products. In the sample of transition countries, it was found that there is a significant and positive relationship between the risk-adjusted profit, which represents bank performance and the use of derivatives, and that the use of derivatives increases the risk-adjusted profit of banks. There was no relationship in the developing sample between risk-adjusted profit and the use of derivatives.