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The Journal of Derivatives

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The Role of Derivatives in Risk Management After the Financial Crisis of 2008

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• First Online: 08 October 2023
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• Xinyu Wu 7  

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Financial derivative instruments are contracts written on the value of another underlying asset or financial variable, which play a crucial role in hedging transactions and managing risk. However, people criticise financial derivatives for their functions in stimulating, amplifying and accelerating the 2008 financial crisis. People wonder if the pros of derivatives outweigh their cons in the subprime crisis, whether these derivatives should be abandoned, or whether more strict supervision should be taken. That we precisely understand these issues is beneficial for us to explore the development of the role of financial derivatives in risk management after 2008.

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Chen, Y.: An empirical analysis of the motivation of commercial banks holding financial derivatives to hedging risks. In: 2021 International Conference on Computer, Blockchain and Financial Development (CBFD), pp. 437–440 (2021). https://doi.org/10.1109/CBFD52659.2021.00094

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Management School, Queen’s University of Belfast, 1A University Road, Belfast, BT7 1NN, UK

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King's Business School, King's College London, London, UK

Canh Thien Dang

Department of Financial Economics and Accounting, University of Murcia, Murcia, Spain

Javier Cifuentes-Faura

Department of Postal Management, Beijing University of Posts and Telecommunications, Beijing, China

Xiaolong Li

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Wu, X. (2023). The Role of Derivatives in Risk Management After the Financial Crisis of 2008. In: Dang, C.T., Cifuentes-Faura, J., Li, X. (eds) Proceedings of the 2nd International Conference on Business and Policy Studies. CONF-BPS 2023. Applied Economics and Policy Studies. Springer, Singapore. https://doi.org/10.1007/978-981-99-6441-3_100

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DOI : https://doi.org/10.1007/978-981-99-6441-3_100

Published : 08 October 2023

Publisher Name : Springer, Singapore

Print ISBN : 978-981-99-6440-6

Online ISBN : 978-981-99-6441-3

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A Study on The Impact of Derivatives on Bank Risk and Profitability

28 Pages Posted: 9 Mar 2021

Independent

Date Written: March 1, 2021

This paper examines the impact of derivatives on bank risk and profitability, with a sample of 25 banks from developed markets during the period 2015 to 2019. The main findings suggest that banks’ use of financial derivatives has decreased bank risk. The major variables include Total Risk, Idiosyncratic Risk, and Systematic Risk. This decrease in risk can be linked to the use of derivatives, to reduce or hedge the risks involved in the bank’s operations. This study also shows that the use of financial derivatives has no significant relationship with a bank’s profitability. Overall, this study contributes to understanding the impact of derivatives use on bank risk and profitability and the consequences of a bank’s business model choice.

Keywords: Bank risk, Bank Profit, Financial derivatives, Risk management

JEL Classification: G00, G20, G21, G23, G24, G32

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SEBI seeks transparency in AI tool usage by investment advisors, research analysts; what this means

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3 min read | Updated on August 16, 2024, 10:05 IST

AI tools “may not adequately safeguard” sensitive data shared during conversations, “potentially leading to unintended data exposure” and concerns related to data security, SEBI said in its consultation paper issued last week.

Headquarters of SEBI, the apex market regulator, in Mumbai (Image: PTI)

The Securities and Exchange Board of India (SEBI), in a recent consultation paper, sought transparency over the usage of artificial intelligence (AI) tools by investment advisors (IAs) and research analysts (RAs).

According to the apex market regulator, the IAs and RAs should disclose to their clients about the extent of the usage of AI tools to provide their services. The paper also emphasised on the importance of strong security measures to avoid unintended data exposure.

This transparency is crucial for clients to to make informed choices about their advisory services, and to understand how AI tools contribute to their investment decisions.

With technological innovations and advancements, many AI tools are currently available in chatbot form such as OpenAI's ChatGPT, Google's Gemini, etc.

AI-based tools allow one to have human-like conversations and receive human-like responses with the chatbot. These tools assist various tasks such as summarising and analysing data and may help in improving efficiency and productivity.

What SEBI said

These AI tools “may not adequately safeguard” sensitive data shared during conversations, “potentially leading to unintended data exposure” and concerns related to data security, SEBI said in its consultation paper issued last week.

While AI tools can provide significant assistance in the work of IAs and RAs, they may not always give meaningful outputs that are expected to be based on the understanding of complex security-specific or client-specific scenarios/ requirements such as personal/ financial conditions or goals, the regulator stated.

Further, such tools may not always provide all the information based on which output/ recommendation has been generated. For example, AI tools may not bring out whether the requirements of risk profiling and suitability have been complied with by IA, it added.

"An IA/RA who uses AI tools for servicing its clients must provide complete disclosure of the extent of use of such tools to its prospective clients, to enable them to take informed decisions of continuance or otherwise with the IA/RA," SEBI suggested.

Notably, AIs provide personalised services according to client-specific requirements based on risk profiling and suitability. Similarly, RAs provide recommendations based on certain parameters and methodology adopted and are required to keep records of the research report, research recommendations and rationale for arriving at research recommendations.

Considering that the investment advice/ research services provided by IA/RA based on AI tools would affect the investment decision of clients, SEBI said, the responsibility of data security, compliance with the regulatory provisions governing investment advisory services/research services lies solely with the IA/RA.

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