Interest Rates and Bank Profitability: Additional Evidence: Note

Abstract

Large banking organizations (1978 assets greater than $2 billion) are well hedged against interest rate fluctuations [2]. When market rates change, their revenues and costs adjust equally quickly, leaving net current operating earnings largely unaffected. At the other institutional extreme, thrift institutions have seriously mismatched balanced sheets [1, 4], causing their earnings to fluctuate violently when interest rates change. Small commercial banks in many ways lie between their larger counterparts and the thrifts. Small banks share the predominantly retail orientation of thrifts (often holding large mortgage portfolios), but have access to a broader range of asset and liability powers. It is therefore unclear ex ante whether small banks bear a greater resemblance to thrifts or large commercial banks in terms of interest rate risk exposure. To resolve the issue empirically, this note applies the methodology of [2] to a set of sixty smaller banks. The empirical results are similar to the results for large banks: the data do not support the conventional wisdom that banks chronically and extensively borrow short and lend long.