What is the Effect of Derivatives on the Index of Bank Stability in Emerging Countries? Evidence and Discussion

This current research tries to answer the widespread debate about the role of derivatives in propagating the last financial crisis. So, this work aims to examine the effect of derivatives on bank stability in emerging countries by using the bank stability index (BSI) as developed by Ghosh (2011) from three major dimensions of banking operations: stability, soundness, and profitability. We use the generalized method of moments (GMM) estimator technique developed by Blundell and Bond (1998) to estimate regressions during the normal, the turbulent, and the whole period, following the guidance given by Chiaramonte, Poli, and Oriani (2013). The major conclusion of this study reveals that except to futures the other derivative instruments cannot be considered as troubling factors. The main implication of the research shows that derivatives – in general – are not responsible for the propagation of the recent financial crisis. Hence, the common debate accusing derivatives as being responsible for the aggravation of the recent financial crisis should be rejected.