Interest rate risk and bank equity valuations

Abstract

Using high-frequency identification, we estimate the reaction of bank stock prices to movements in interest rates prompted by FOMC announcements and examine how this reaction varies with key bank characteristics. Bank stock prices decline significantly following unanticipated increases in the level or slope of the yield curve. The reaction is larger for banks that rely heavily on core deposits but is reduced for banks with a large maturity mismatch, consistent with banks’ role in maturity transformation. Policy-induced interest rate changes appear to affect accounting profits primarily through net interest margins and changes in the composition of bank balance sheets.