On the risk management of demand deposits: quadratic hedging of interest rate margins

Adam, Alexandre; Cherrat, Hamza; Houkari, Mohamed; Laurent, Jean Paul; Prigent, Jean‐Luc

doi:10.1007/s10479-020-03726-1

Cited by 3 publications

(3 citation statements)

References 35 publications

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“…In sum, we find evidence for the core hypothesis that demand deposits of banks will increase as a reaction to the classification of banks as DSIB. Studies have indicated that there are risks posed by augmenting demand deposits (Adam et al, 2022). Central banks should monitor the deposit position, as there are inherent risks when bank demand deposits increase substantially as maturity mismatches can result in issues in terms of the Diamond-Dybvig model.…”

Section: Resultsmentioning

confidence: 99%

Do Systematically Important Banks Pursue Low-Cost Deposits: Insights from a Difference-in-Differences Estimation

Venugopal

2023

TEL

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This study examines the impact of the classification of Domestic Systematically Important banks (DSIBs) and their approach to deposits. The research was conducted within the Indian context using a dataset of Indian banks from 2006 to 2022, with a pretreatment period of 2006-2015 and a posttreatment period of 2020-2022. The main hypothesis centers on the plausibility of DSIBs increasing their demand deposits to compensate for the constraints induced by the additional capital requirements imposed on them. A difference-in-differences (DID) estimation was performed to assess the impact of the change in classification on the deposit structure. The Breusch-Pagan test was used to assess heteroskedasticity, and a cluster-robust standard errors-based DID method was adopted to account for heteroskedasticity in the data. DID assessment was performed after controlling for total assets, which was used as a proxy for bank size. The parallel trends assumption was tested using a parallel trend test, and robustness was further checked using a Granger causality test. We find that the volume of demand deposits increased after the classification of these banks as being systematically important banks. We also find evidence that, on a comparable scale, the change in interbank deposits for DSIBs is much greater than the change in retail deposits from other sources.

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Section: Resultsmentioning

confidence: 99%

Do Systematically Important Banks Pursue Low-Cost Deposits: Insights from a Difference-in-Differences Estimation

Venugopal

2023

TEL

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“…However, this was not the case in Slovakia -the government did not have to help the banks, but nevertheless took this step. From the beginning, however, this plan was seen as temporary [23].…”

Section: Resultsmentioning

confidence: 99%

Bank levy

Michalíková

2021

SHS Web of Conf.

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Research background: The bank levy was approved in 2011 and entered into force in 2012. Shortly after the economic crisis, Slovakia was not the only country to introduce it. Unlike other countries, the Slovak government did not have to help banks financially and then compensate for this help by increasing their taxation. The bank levy thus served mainly to improve the overall image of public finances in the country. Purpose of the article: The main goal of the article is to confirm the correctness of the abolition of the bank levy, which has distorted the management of banks in Slovakia for almost a whole decade. The abolition of the levy will contribute to greater stability of the banking sector, which will be helpful in the restart of the Slovak economy affected by the crisis caused by the covid-19 pandemic. Methods: Analysis of the legislation regulating the introduction of a bank levy in Slovakia, its development from the introduction of a bank levy to its abolition. Comparison of the expected benefits of this tool with reality. Findings & Value added: The article monitors the development of bank levies in Slovakia from its introduction to its abolition. The imposition of a bank levy resulted in additional taxation of the banking sector. The difference compared to other taxes was that the amount of the levy does not depend on the bank’s profit, but on the size of its liabilities.

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“…Indeed, we can extend previous problem by examining a more general form of the quadratic hedging strategy. Unlike the framework of quadratic hedging considered in Adam et al (2020), we allow the manager to trade on the demand deposit amount itself. For example, he or she may decide not to invest part of this amount at market rates during some time periods.…”

Section: Quadratic Hedging For Interest Rate Marginsmentioning

confidence: 99%

On the Hedging of Interest Rate Margins on Bank Demand Deposits

Cherrat

Prigent

2022

Comput Econ

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In recent years, we have seen a very rapid increase in outstanding bank deposits. This increase has been particularly high since the outbreak of the COVID 19 pandemic, due to the lockdown that has, among other things, drastically reduced household consumption since the beginning of March 2020. This very sharp increase in outstandings increases the risk of banks which offer interest on deposits. In this paper, we deal with the mitigation of the risk contained in interest rate margins of demand deposits. We introduce and analyze hedging strategies of an asset and liability manager who focuses on the bank’s net operating income in a given quarter under standard accounting rules. Demand deposits are assumed to be correlated with market interest rate and to a commercial risk that cannot be fully hedged on the financial markets. We distinguish several types of dynamic hedging strategies based on both quadratic and quantile criteria. We provide explicit formula for all hedging strategies and we discuss their respective robustness. We show in particular that the quantile hedging criterion leads to somewhat riskier strategy since its gain may be nil, due to its knockout feature. We argue that our contribution establishes a stronger basis for the coverage of bank deposits, which is particularly important in the context of the COVID-19 pandemic and its economic consequences.

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On the risk management of demand deposits: quadratic hedging of interest rate margins

Cited by 3 publications

References 35 publications

Do Systematically Important Banks Pursue Low-Cost Deposits: Insights from a Difference-in-Differences Estimation

Do Systematically Important Banks Pursue Low-Cost Deposits: Insights from a Difference-in-Differences Estimation

Bank levy

On the Hedging of Interest Rate Margins on Bank Demand Deposits

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