Derivatives and Risk Management in the Banking Industry

Abstract

The purpose of this study is to examine issues surrounding the enactment of Financial Accounting Statement 133 (SFAS 133) in managing risk in the banking industry. It examined the financial statements of ten major U.S. banks by investigating their 10Ks and 10Qs from 1999 to 2002. It found out that banks that had large hedge positions before SFAS 133 reduced their exposures for a while and increased their positions in 2002. Interestingly, those banks with small hedged positions before the rule, increased their positions after the adoption of SFAS 133. As expected the statement increased the degree of disclosure and transparency of derivatives activities which compliments the Sarbanes Oxley Act of 2002.