Trading income and bank charter value during the financial crisis: Does derivatives dealer designation matter?

•We examine the relationship between derivative trading income and bank charter value for bank holding companies (BHC).•Trading income negatively impacts charter value; it becomes positive when interacted with derivative dealer designation.•Trading income's high volatility and small contribution to net operating revenue damped its impact on BHC charter value.•Finally, the results indicate that trading income did not contribute to overall BHC income during the financial crisis.

Derivative markets have exploded over the last decade, remained active in the midst of the 2007–2009 financial crisis and continue to be dominated by a small group of bank holding companies (BHC). BHC motives for derivative usage are usually tied to hedging purposes (balance sheet risk management), trading purposes (profit motives) or some combination thereof. This paper examines the relationship between derivative trading income and bank charter value for 27 BHC between 2001Q1 and 2011Q3. We find that the impact of derivative trading income on bank charter value, using Tobin's Q, is very small and seems to be tied to BHCs derivatives dealer trading designation. We also find that trading incomes are a modest fraction of net operating revenue, highly volatile, and did not contribute to overall BHC income during the crisis.