An empirical analysis of bank interest rate swaps

Kim, Sung Hwa; Koppenhaver, Gary D.

doi:10.1007/bf01048340

Cited by 49 publications

(25 citation statements)

References 16 publications

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“…Panel A of Table 8 showing that larger banks are more likely to use swaps (e.g., Booth et al, 1984;Kim and Koppenhaver, 1992). The average NIM for non-swap-using banks is slightly greater than swapusing banks, but the difference is not statistically significant.…”

Section: B Descriptive Statisticsmentioning

confidence: 90%

“…However, there are no studies examining what characteristics of companies affect the use of certain type of swaps, i.e., RF swaps or RV swaps. For example, it is known that there is economies of scale regarding initiating and maintaining a hedging program (e.g., Booth et al, 1984;Mian, 1996;Geczy et al, 1997, Haushalter, 2000, Kim and Koppenhaver, 1992. This implies that bank size is positively associated with the level of total swap usage.…”

Section: Hypothesis Developmentmentioning

confidence: 92%

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Are Interest Rate Swaps Used to Manage Banks' Earnings?

Song

2004

SSRN Journal

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Previous research has shown that loan loss provisions and security gains and losses are used to manage banks' net income. However, these income components are reported below banks largest operating component, net interest income (NII). This study extends the literature by examining whether banks exploit the accounting permitted under past and current hedge accounting standards to manage NII by entering into interest rate swaps. Specifically, I investigate whether banks enter into receive-fixed/pay-variable swaps to increase earnings when unmanaged NII is below management's target for NII. In addition, I investigate whether banks enter into receive-variable/pay-fixed swaps to decrease earnings when unmanaged NII is above management's target for NII. Swaps-based earnings management is possible because past and current hedge accounting standards allow receive-fixed/pay-variable swaps (receivevariable/pay-fixed) to have known positive (negative) income effects in the first period of the swap contract. However, entering into swaps for NII management is not costless, because such swaps change the interest rate risk position throughout the swap period. Thus, I also examine whether banks find it cost-beneficial to enter into offsetting swap positions in the next period to mitigate interest rate risk caused by entering into earnings management swaps in the current period. Using 546 bank-year observations from 1995 to 2002, I find that swaps are used to manage NII. However, I do not find evidence that banks immediately enter into offsetting swap positions in the next period. In sum, this research demonstrates that banks exploit the accounting provided under past and current hedge accounting rules to manage NII. This NII management opportunity will disappear if the FASB implements full fair value accounting for financial instruments, as foreshadowed by FAS No. 133.

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Section: B Descriptive Statisticsmentioning

confidence: 90%

Section: Hypothesis Developmentmentioning

confidence: 92%

Are Interest Rate Swaps Used to Manage Banks' Earnings?

Song

2004

SSRN Journal

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“…We examine the derivatives activities of large U.S. banks, as smaller banks rarely use derivatives (Booth, Smith, and Stolz 1984;Carter and Sinkey 1998;Gunther and Siems 1996;Kim and Koppenhaver 1993;Koppenhaver 1990 Futures A futures contract is an agreement to buy or sell a specified asset of standardized quality and quantity traded on a futures exchange at a certain date in the future, at a previously specified price. A centralized clearinghouse manages transactions on the exchange.…”

Section: Sample and Data Collectionmentioning

confidence: 99%

The Hazards of Expert Control: Chief Risk Officers and Risky Derivatives

2017

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At the turn of the century, regulators introduced policies to control bank risk-taking. Many banks appointed chief risk officers (CROs), yet bank holdings of new, complex, and untested financial derivatives subsequently soared. Why did banks expand use of new derivatives? We suggest that CROs encouraged the rise of new derivatives in two ways. First, we build on institutional arguments about the expert construction of compliance, suggesting that risk experts arrived with an agenda of maximizing risk-adjusted returns, which led them to favor the derivatives. Second, we build on moral licensing arguments to suggest that bank appointment of CROs induced "organizational licensing," leading trading-desk managers to reduce policing of their own risky behavior. We further argue that CEOs and fund managers bolstered or restrained derivatives use depending on their financial interests. We predict that CEOs favored new derivatives when their compensation rewarded risk-taking, but that both CEOs and fund managers opposed new derivatives when they held large illiquid stakes in banks. We test these predictions using data on derivatives holdings of 157 large banks between 1995 and 2010.

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“…The data used by WP pertain to 1986 when disclosure of swap usage was not required. Kim and Koppenhaver (1992) study the determinants of swap usage by banks. Their data are obtained from the Federal Reserve System's Report of Condition and Income for June 1985 to March 1991.…”

Section: Interest-rate Swaps and Optimal Debt Maturity Structurementioning

confidence: 99%

An empirical study of interest rate swap usage by nonfinancial corporate business

Samant

1996

J Finan Serv Res

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This study examines the relationship between the probability and extent of a firm's participation in interestrate swap markets and the magnitude of some of its operating and financial ratios. These ratios are selected to proxy incentives to reduce agency costs of leverage and information asymmetry in credit markets. The data on swap usage are obtained from disclosures mandated by SFAS 105. The results suggest that fixed-rate payers, compared to non-swap-users, have more leverage, greater profitability, more growth options, less operating risk, lower ratios of fixed to total assets, and more divergent earnings estimates. On the other hand, floating-rate payers do not seem to have financial and operating characteristics significantly different from non-swap-users, although they do have less divergent earnings estimates.One of the most important developments in the financial services industry in the last decade is the spectacular growth in the market for interest-rate swaps. The volume of outstanding swaps in 1992 (measured in terms of notional principal) is an estimated $2.3 trillion. 1 Conventional explanations of the growing popularity of interest-rate swaps are often based on their supposed ability to reduce effective costs of borrowing through financial arbitrage. These "explanations" of the economic value of swaps usually rely on the existence of an ad hoc market imperfection such as a quality spread differential between the terms of loans contracted at fixed and floating interest rates, which results in a comparative advantage for a firm in one market. 2 However, Turnbull (1988) and Rendleman (1992) demonstrate clearly that, in the absence of externalities, an interestrate swap is a zero-sum game between counterparties, and conventional explanations of the tangible benefits of swaps are therefore not convincing. More satisfactory explanations have relied on the role of swaps in mitigating information asymmetry in credit markets (Arak et al, 1988;Titman, 1992), reducing agency costs of leverage (Wall, 1989), expropriating guarantor wealth (Rendleman, 1992), and the special treatment of swaps in bankruptcy proceedings (Litzenberger, 1992). This study investigates whether there is evidence in cross-sectional data to support the agency cost and information asymmetry explanations for swap usage.

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An empirical analysis of bank interest rate swaps

Cited by 49 publications

References 16 publications

Are Interest Rate Swaps Used to Manage Banks' Earnings?

Are Interest Rate Swaps Used to Manage Banks' Earnings?

The Hazards of Expert Control: Chief Risk Officers and Risky Derivatives

An empirical study of interest rate swap usage by nonfinancial corporate business

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