Derivative risk management and hedge accounting strategies: Evidence from the European banking sector
Rikka, Aleksi (2025)
2025
Kauppatieteiden maisteriohjelma - Master's Programme in Business Studies
Johtamisen ja talouden tiedekunta - Faculty of Management and Business
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Hyväksymispäivämäärä
2025-05-14
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:tuni-202505135401
https://urn.fi/URN:NBN:fi:tuni-202505135401
Tiivistelmä
The use of financial derivatives in banks has increased throughout the 21st century, as they are used to hedge risks and reduce earnings volatility. Derivative instruments derive their value from an underlying asset, and when designated for hedging, help to offset both gains and losses in the value of hedged items such as bonds. In response to the 2008 financial crisis, the International Accounting Standards Board (IASB) strengthened hedge accounting standards and financial reporting of derivatives, leading to introduction of the International Financial Reporting Standard no. 9 (IFRS 9).
The objectives of this research were to analyze how derivative instruments are used as part of risk management strategies and to assess whether the hedge accounting disclosure requirements have aligned financial reporting with these derivative practices. Empirically, this thesis examines derivative risk management and hedge accounting activities of ten major European banking groups that apply IFRS standards for derivative implementation and report hedge accounting disclosures under the IFRS 9. Research scope was set between 2017 – 2023, where qualitative content analysis, supported by tables of derivative notional amounts, was used for consolidated financial statements.
Derivatives were primarily used for interest rate exposures and classified in accounting as trading derivatives for speculative purposes but also for economic hedges. Earnings volatility was managed through hedge accounting, where the most commonly used method was fair value hedging for fixed-rate assets or liabilities. However, hedge accounting strategies were influenced by the European Union (EU) carve-out policy and the continued use of the prior International Accounting Standard no. 39 (IAS 39). Most derivative contracts were traded over-the-counter (OTC), exposing banking groups to counterparty credit risk, which was mitigated by regulatory requirements under the European Market Infrastructure Regulation (EMIR).
IFRS 9 disclosure requirements had aligned reporting closer with derivative risk management strategies, enabling users of the financial statements to better assess the impacts of hedge accounting. The standard also enhanced both qualitative and quantitative disclosures related to derivative instruments. However, as a limitation of the research, the principle-based nature of IFRS standards allowed varying interpretations and inconsistencies for hedge accounting disclosures. These findings contributed to the limited collection of research on derivative risk management and hedge accounting in the European banking sector. By offering new empirical insights, the results were aimed to provide a comprehensive review for users of the financial statements and other stakeholders within the European banking sector.
The objectives of this research were to analyze how derivative instruments are used as part of risk management strategies and to assess whether the hedge accounting disclosure requirements have aligned financial reporting with these derivative practices. Empirically, this thesis examines derivative risk management and hedge accounting activities of ten major European banking groups that apply IFRS standards for derivative implementation and report hedge accounting disclosures under the IFRS 9. Research scope was set between 2017 – 2023, where qualitative content analysis, supported by tables of derivative notional amounts, was used for consolidated financial statements.
Derivatives were primarily used for interest rate exposures and classified in accounting as trading derivatives for speculative purposes but also for economic hedges. Earnings volatility was managed through hedge accounting, where the most commonly used method was fair value hedging for fixed-rate assets or liabilities. However, hedge accounting strategies were influenced by the European Union (EU) carve-out policy and the continued use of the prior International Accounting Standard no. 39 (IAS 39). Most derivative contracts were traded over-the-counter (OTC), exposing banking groups to counterparty credit risk, which was mitigated by regulatory requirements under the European Market Infrastructure Regulation (EMIR).
IFRS 9 disclosure requirements had aligned reporting closer with derivative risk management strategies, enabling users of the financial statements to better assess the impacts of hedge accounting. The standard also enhanced both qualitative and quantitative disclosures related to derivative instruments. However, as a limitation of the research, the principle-based nature of IFRS standards allowed varying interpretations and inconsistencies for hedge accounting disclosures. These findings contributed to the limited collection of research on derivative risk management and hedge accounting in the European banking sector. By offering new empirical insights, the results were aimed to provide a comprehensive review for users of the financial statements and other stakeholders within the European banking sector.