The aim of this paper is to analyze the impact of derivatives use on the stability of the banks that are operating in Turkish banking system for the period between 2005 and 2014, which is the period after the establishment of Turkish Derivatives Exchange. The risk of a bank is defined as a probability of default and Z-index is calculated for each bank. The results show that derivative instruments significantly increase the risks of banks; on the other hand bank risk is not a significant determinant of derivative usage. Liquid assets also increase and interest revenues decrease the risk of banks. When the determinants of derivative portolio is analyzed it is understood that larger banks and foreign banks and banks with larger loan portfolio and liquid assets hold more of derivative products and banks which have higher interest revenues to total assets are more likely to engage in traditional banking activities.
Keywords: Bank risk, Z-index, derivative usage, Turkish banking sector