Who Bears Interest Rate Risk?

Abstract

We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. Contrary to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance-sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector. Received October 31, 2017; editorial decision August 30, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

What drives the short‐term fluctuations of banks' exposure to interest rate risk?

“…In line with previous analyses, we find that the regulatory threshold of 20% has a strong influence: if a bank had an interest rate risk exposure exceeding this threshold in the previous quarter, the bank—on average—reduces its exposure in the following quarter. In accordance with Purnanandam () (US banks), Memmel and Schertler () (German banks) and Hoffmann et al () (large European banks), we find evidence that banks use, on average, interest rate swaps to hedge, and not to speculate on interest rate risk, as can be seen from the (at least in the sample with all banks) significantly negative coefficient for the variable (however, Begenau et al () find the opposite effect). All these results are in line with the idea that banks actively manage their exposure to interest rate risk in the short run, thereby considering the earning opportunities of this risk and regulatory issues.…”

“…This paper also contributes to the literature by exploring whether and how firms tactically manage their interest rate risk (see for banks, e.g., Brewer, Jackson, and Moser (), Brewer, Minton, and Moser (), Begenau, Piazzesi, and Schneider () and Drechsler, Savov, and Schnabl () and for non‐financial firms, e.g., Oberoi ()). Purnanandam (), Memmel and Schertler (), and Hoffmann, Langfield, Pierobon, and Vuillemey () show that US, German and European banks, respectively, use interest rate swaps, on average, for hedging purposes. However, Begenau et al () find the opposite for US banks, that is, that US banks use interest swaps to increase their position in interest rate risk.…”

Retracted: Risk Management in Financial Institutions

“…Drechsler, Savov, and Schnabl (2018) argue that banks' interest rate exposures may be more limited than commonly thought because deposit rates move more slowly than their short-term maturity suggests. Hoffmann et al (2019) study the allocation of interest rate risk in the banking sector and find heterogeneous bank exposures as well as limited hedging. Vuillemey (2019) models the optimal management of interest rate risk by financial institutions.…”

Ki válthatja ki a hitelét? A változó kamatozású jelzáloghitelek piaci alapú refinanszírozási lehetőségei és korlátai

“…A kamatozás kérdése azért is releváns, mert a jelzáloghitelek kamatozásának jellemző módja a bankrendszer mérlegére is jelentős hatást gyakorol. Az eurozónában például azon országokban, amelyekben a rögzített kamatozású jelzáloghitelek terjedtek el, a bankok jellemzően magasabb kamatkockázatot vállalnak, tehát nem fedezik teljes mértékben a kamatpozíciójukat (ECB 2018;Hoffmann et al 2018). Így, bár az eladósodott háztartások védve vannak egy kamatemelés hatásai ellen ezekben az országokban, a bankok számára a kamatemelés a jelzáloghiteleken elért profit csökkenésével jár.…”