CHICAGO -- Bank participation in derivatives markets appears to promote credit accessibility, according to a Federal Reserve study.
In comparing banks that have participated in interest-rate swaps markets during the last seven years to others, researchers found that these lenders saw greater than average growth in their business lending.
The findings suggest that excessive government restrictions on bank derivatives activities could limit the pool of bank credit available for lending to businesses and consumers, the study's authors say.
"The use of swaps generally increases lending activity," said James T. Moser, an economist at the Federal Reserve Bank of Chicago. "Inappropriate restrictions on banks' use of derivatives may result in declining lending."
Focus on Risk
Mr. Moser presented the study last week at a conference sponsored by the Chicago Fed. At the two-day meeting, the risks and benefits of derivatives gained widespread attention.
Much of the recent focus on derivatives use has fallen on their risks: In seeking higher returns, some companies have taken positions in these markets that risk huge sums of money. In particular, banks' use of them to speculate as well as to hedge has gained attention.
While some policymakers have suggested that the risks warrant restrictions on derivatives, Fed officials have taken a more upbeat position. They say that while concerned about cavalier participation in the markets, they remain mindful of their benefits and do not want to needlessly limit them.
History of Risk Management
"The endeavors to sort of define these as some exotic new instrument - new product - arc really to miss the history of the evolution of risk management in the banking and financial system," Fed Chairman Alan Greenspan said at the conference.
"We must remember that derivatives are nothing more than the expansion of the overall structure of risk-management for all types of credit," he added. "They are not distinct and separate instruments by themselves. They are part of an evolving risk-management system."
The Fed study linking swaps to business lending provides one more example of the benefits of the instruments, Fed officials said. It was written by Mr. Moser and two other economists affiliated with the Chicago Fed: Elijah Brewer 3d and Bernadette A. Minton.
Link to Business Lending
The three economists reviewed the lending, swaps, futures, and securities activity at several hundred commercial banks between 1985 and 1992. They wanted to learn whether banks' growing use of interest-rate swaps during that period was related to declines in their roles as business lenders.
They found just the opposite. Swaps activity was positively associated with growth in business lending.
The researchers also examined the relationship between derivatives use and securities holding, and found that these were negatively related.
The authors suggested that the use of derivatives contracts to hedge reduces banks' intermediation costs. The interest-rate exposure of their business-lending portfolios is reduced, they said.
Their research focused only on the interest-rate swaps, one of the less exotic forms of derivatives that have gained wide-spread acceptance. The authors did not look at the more sophisticated and complex forms about which policymakers have grown increasingly worried.
Nonetheless, the relationship they found between swaps and lending implies that government restrictions "could increase the rate of decline in bank lending activity," they said.