Financial derivatives increase bank risk, leading to potential market instability.
Financial derivatives used by banks can increase their risk, especially when used for speculation or accounting mismatches. This risk is higher for banks not too big to fail and those with a traditional retail banking model. The relationship between derivatives use and risk is not straightforward and can vary. The study looked at 555 banks in 18 developed markets from 2006 to 2015 to understand how derivatives impact bank risk.