derivatives, derivative financial instruments, banking system, global financial crisis, hedging, risk mitigation methods


Financial institutions have faced a variety of threats, the main reasons for which are weak lending standards, ineffective risk evaluation of the loan portfolio, lack of attention to economic and other factors that can affect the creditworthiness of bank counterparties. Thus, among various threats, credit risk, caused by lending, remains the main source of problems for commercial banks. However, globalization and liberalization of the global financial system has led to the appearance of other sources, including trade and investment transactions, which are reflected both on the balance sheet and off-balance sheet. Banks are increasingly faced with credit risk in other financial operations – for example, with derivative financial instruments.

Effective credit risk management is a critically important component of the comprehensive approach to risk management and the long-term success of a banking organization. The use of financial instruments that allows commercial banks to transfer credit risk to a third party for a fee and, thus, avoid the additional costs for forming reserves, has become one of the ways to prevent negative consequences. However, despite the many advantages associated with the risk hedging, credit derivatives, like other financial innovations, pose additional risks directly related to the application of these instruments. For example, these risks have manifested themselves in the global financial crisis of 2008-2009 and minimized the positive effect of the credit derivatives.

This article discusses the advantages and disadvantages of using credit derivatives by commercial banks, shows the need for timely identification of probable risks and the development of effective methods for managing them by both the risk management of the bank and regulators.


Download data is not yet available.

Author Biographies

Anastasiia Petruk, Zhytomyr Polytechnic State University

PhD Student

Roman Stadniichuk, Banking University

PhD Student


Abor, J. Y., Gyeke-Dako, A., Fiador, V. O., Agbloyor, E. K., Amidu, M., & Mensah, L. (2019). Off-Balance Sheet Activities. In Money and Banking in Africa (pp. 149-157). Springer, Cham.

Anbil, S., Saretto, A., & Tookes, H. (2016). Does Hedging with Derivatives Reduce the Market's Perception of Credit Risk? FEDS Working Paper, 100.

Bergh, D. D., Ketchen Jr, D. J., Orlandi, I., Heugens, P. P., & Boyd, B. K. (2019). Information asymmetry in management research: Past accomplishments and future opportunities. Journal of management, 45(1), 122-158.

Choudhry, M. (2010). Structured credit products: Credit derivatives and synthetic securitisation. John Wiley & Sons.

De Vries Robbé, J. J. (2008). Securitization law and practice: in the face of the credit crunch. Kluwer Law International BV.

Fabozzi, F. J., Modigliani, F. P., Jones, F. J. (2009). Foundations of financial markets and institutions (4th ed.). Frank J. Fabozzi, Franco P. Modigliani, Frank J. Jones (Eds.). New York, NY: Prentice Hall.

Finnerty, J. D. (1998). The Pricewaterhousecoopers credit derivatives primer. Pricewaterhousecoopers LLP, New York. Retrieved 01.07.2020 from

Gibson, S. M. (2007). Credit Derivatives and Risk Management, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs. Federal Reserve Board, Washington, D.C. Retrieved 01.07.2020 from

Glavan, B. (2009). Toxic assets or harmful regulations? CDS case. Original: Active toxic Cazul CDS-urilor, Centrul pentru Economie si Libertate. Retrieved 01.07.2020 from

Grima, S., & Thalassinos, E. I. (2020). Financial Derivatives: A Blessing or a Curse? Emerald Group Publishing.

Iacono, F. (1997). Derivatives Handbook: Risk Management and Control (Chapter 2 «Credit Derivatives»). Capital Markets Risk Advisors.

Jurkowska, A. (2018). ORGANIZATIONAL MODEL OF POLISH COOPERATIVE BANKS IN THE POST-CRISIS REGULATORY ENVIRONMENT. Financial and credit activity: problems of theory and practice, 4(27), 88-100.

Kothari, V. (2008). Introduction to credit derivatives. Handbook of Finance, 1. Retrieved 01.07.2020 from

Kuznetsova, A. Y., & Pohorelenko, N. P. (2020). MECHANISM OF PROVIDING FINANCIAL STABILITY OF THE BANKING SYSTEM OF UKRAINE. Financial and credit activity: problems of theory and practice, 2(33), 37-47.

Lanets, S. (2016). FINANCIAL STABILITY OF BANKS IN TIMES OF CRISIS. Baltic Journal of Economic Studies, 1(1), 122-125.

Lentner, Cs., Vasa, L., Kolozsi, P. P., & Zéman, Z. (2019). New dimensions of internal controls in banking after the GFC. Economic Annals-ХХI, 176 (3-4), 38-48.

Lubben, S. J. (2007). Credit Derivatives and the Future of Chapter 11. American Bankruptcy Law Journal, 81(4), 409-412. Retrieved 01.07.2020 from

Mejstrik, M., Pecena, M., & Teply, P. (2015). Bankovnictvi v teorii a praxi/Banking in Theory and Practice. Charles University in Prague, Karolinum Press.

Minton, B. A., Stulz, R., & Williamson, R. (2009). How much do banks use credit derivatives to hedge loans? Journal of Financial Services Research, 35(1), 1-31.

Moshenskyi, S. Z. (2018). Khaos i sinergiya: Rynok tsennykh bumag postindustrialnoy epokhi [Chaos and synergy. The securities market of the postindustrial era]. Kyiv: VB «Vipol». (in Ukrainian)

Neisen, M., & Roth, S. (2018). Basel IV: The next generation of risk weighted assets. John Wiley & Sons.

Novak, O., Osadcha, T., & Petruk, O. (2019). Concept and сclassification of derivative financial instruments as a methodological precision on their regulation in the financial services market. Baltic Journal of Economic Studies, 5(3), 135-144.


Poledna, S., Molina-Borboa, J. L., Martínez-Jaramillo, S., Van Der Leij, M., & Thurner, S. (2015). The multi-layer network nature of systemic risk and its implications for the costs of financial crises. Journal of Financial Stability, 20, 70-81.

Prymostka, L. (2001). Finansovi deryvatyvy: analitychni ta oblikovi aspekty: monoghrafija [Financial derivatives: analytical and accounting aspects: monograph]. Kyiv: KNEU. (in Ukrainian)

Pylypenko, L. (2016). Accounting for derivatives and their representation in financial reporting: problems of methodology and procedure. Economic Annals-ХХI, 156 (1-2), 116-120.

Radova, N. V., & Garkyscha, Y. O. (2018). METHODS AND INSTRUMENTS OF CREDIT RISK MANAGEMENT IN BANKS. Financial and credit activity: problems of theory and practice, 3(26), 64-71.

Shah, A. (2010). Global Financial Crisis. Retrieved 01.07.2020 from

Shamsher, M., & Taufiq, H. (2008). Asian derivative markets: Research issues. International Journal of Banking and Finance, 5(1), 1-25. Retrieved 01.07.2020 from

Shevchenko, A. M. (2018). The feasibility and risks of investing in modern financial instruments. Financial and credit activity: problems of theory and practice, 1(24), 229-236. Retrieved 01.07.2020 from

Shvayko, M. L., & Grebeniuk, N. O. (2020). CURRENT CREDITING INSTRUMENTS INFLUENCING INVESTMENT CLIMATE IN UKRAINE. Financial and credit activity: problems of theory and practice, 1(32), 414-423.

Simkovic, M. (2008). Secret Liens and the Financial Crisis of 2008, American Bankruptcy Law Journal, 83, 253. Retrieved 01.07.2020 from

Sinkey, J. (2007). Financial management in commercial banks and financial services industry.–Moscow: Alpina Business Books, 1018.

Sutorova, B., & Teply, P. (2014). The level of capital and the value of EU banks under Basel III. Prague Economic Papers, 23(2), 143-161.

Tally Jr, R. T. (2010). Meta-Capital: Culture and Financial Derivatives. Retrieved 01.07.2020 from Capital_Culture_and_Financial_Deriv.pdf?sequence=1&isAllowed=y

Umlauft, T. S. (2015). Regulators' Irrational Rationality and Bankers' Rational Irrationality: Too Big to Fail, Self-Regulation, Moral Hazard and the Global Financial Crisis, 2007-2009. Austrian Journal of Historical Studies (Oesterreichische Zeitschrift für Geschichtswissenschaften), 26, 21-45. Retrieved 01.07.2020 from

Zabolotskyy, T., Vitlinskyy, V., & Shvets, V. (2018). Optimality of the minimum VaR portfolio using CVaR as a risk proxy in the context of transition to Basel III: methodology and empirical study. Economic annals-XXI, (174), 43-50.




How to Cite

Petruk, A., & Stadniichuk, R. (2020). CREDIT DERIVATIVES IN BANKING: BENEFITS AND THREATS. European Cooperation, 3(47), 7–16.