They verify this as well as showing that loan growth of banks not using derivatives falls below the predicted growth rates when the derivatives variable is used to make predictions. Second, they examine the proposition that derivatives activities increase bank risk. In only one year did the failure rate for derivatives using banks exceed the failure rate for the overall sample. This sample period is 1985 through 1989. Regressions of stock return variability on a variety of operational and financial variables indicate that associations using derivatives are less risky than those not using derivatives.
SLA risk is calculated by computing variances of daily stock returns over one-quarter intervals.
Variances are regressed on variables previously found to explain SLA risk, adding to these specifications an indicator variable for derivative usage. Corroborating evidence of this result is then found by regressing rates for uninsured certificates of deposit on a similar set of explanatory variables. CDs used in this procedure have maturities between six and twelve months. A negative coefficient on the derivatives variable in this case suggests a lower risk premium for associations using derivatives. Funding costs for institutions using derivatives were found to be significantly lower.