Interest-rate derivatives and bank lending

We study the relationship between bank participation in derivatives contrac ting and bank lending for the period 30 June 1985 through the end of 1992. Since 1985 commercial banks have become active participants in the interest -rate derivative products markets as end-users, or intermediaries, or both. Over much of this period significant changes were made in the composition of bank portfolios. We find that banks using interest-rate derivatives expe rience greater growth in their commercial and industrial (C&I) loan portfol ios than banks that do not use these financial instruments. This result is consistent with the model of Diamond (Review of Economic Studies 51, 1984, 393-414) which predicts that intermediaries' use of derivatives enables inc reased reliance on their comparative advantage as delegated monitors. (C) 2 000 Elsevier Science B.V. All rights reserved.