Date of Award
Doctor of Philosophy (PhD)
Dr. Teofilo Ozuna
Dr. Alberto Davila
Dr. Jose Pagan
During the 1990s, Latin American countries implemented policies aimed at liberalizing their financial markets. Latin American countries deregulated the domestic financial and banking industries, removed controls on international capital flows, and promoted development of their domestic stock market. These countries implemented financial liberalization policies and programs in order to stimulate domestic savings and growth. Through financial liberalization they also attempted to reduce the direct intervention of the state in the economy and improve their financial infrastructure.
The implementation of such policies has led to an increase in capital flows to Latin America, an increase in the number of foreign banks, and the opening of stock markets in the region. The recent financial liberalization policies have also changed the business environment of the banking industry considerably, in terms of both competition and risk. Banks have begun to implement internal risk management programs to minimize the consequent risk of financial liberalization. Accordingly, Latin American banks have increased substantially their use of derivatives.
Given the potential benefits provided by the use of derivatives when managing risk, the objective of this dissertation is to determine the impact and the consequences of the use of derivatives by Latin American banks. Specifically, this study contributes to the literature in several aspects. First, the study provides information on the use of derivatives by Latin American banks; second, it provides evidence on the relationship between risk and the use of derivatives by Latin American banks; and third, this study provides evidence on the relationship between efficiency and the use of derivatives by Latin American banks.
The empirical results highlight three major findings. First, Latin American banks are not using derivatives to coordinate their interest-rate risk and credit risk management strategies and are not using derivatives as substitutes for on-balance sheet activities such as dividend payouts and liquidity. From a broad point of view, the findings suggest that Latin American banks might be using derivatives to speculate rather than to hedge risk. Although this last finding is consistent with prior studies in the US studies, little weight should be placed on this finding since the methodology employed is not capable of addressing the issue of simultaneity bias between interest-rate risk exposure and derivative usage. Second, derivatives play a significant role in shaping the interest-rate risk exposure faced by Latin American banks since they use derivatives to enhance their interest-rate risk exposure. Third, there exist a positive and significant relationship between derivatives use and the efficiency of Latin American banks. The implication of these results is that Latin American financial policy-makers should reduce concerns about the need for new regulations and greater restrictions on bank's derivatives activities.
University of Texas-Pan American