Derivatives use, bank risk and profitability: Panel evidence from Turkish commercial banks (2011-2024)

Abstract

This study examines the relationship between financial derivatives use, bank risk, and profitability by employing random-effects and cluster-robust random-effects models on panel data for 11 commercial banks operating in Türkiye over the 2011–2024 period. The findings from the bank risk model indicate that derivatives use does not have a statistically significant effect on bank risk. By contrast, the change in the loans-to-total-assets ratio is negatively associated with banks’ Z-scores, implying that increases in lending intensity are associated with higher bank risk. In addition, bank size is positively related to banks’ Z-scores, suggesting that larger banks tend to exhibit lower risk. In the profitability model, derivatives use is negatively associated with return on assets, although this effect weakens after the use of cluster-robust standard errors. The results also show that the cost-to-income ratio is negatively associated with profitability, whereas gross domestic product is positively associated with return on assets across model specifications. Overall, the findings suggest that derivatives do not play a decisive role in shaping bank risk and profitability in Turkish commercial banks, while bank-specific and macroeconomic factors appear to be more influential.