What Drives the Short-Term Fluctuations of Banks' Exposure to Interest Rate Risk?

Christoph Memmel

doi:10.2139/ssrn.3337430

Abstract

We investigate whether banks actively manage their exposure to interest rate risk in the short run. Using bank-level data of German banks for the period 2011Q4- 2017Q2, we find evidence that banks actively manage their interest rate risk exposure in their banking books: They take account of their regulatory situation and adjust their exposure to the earning opportunities of this risk. We also find that the customers' preferences predominantly determine the fixed-interest period of housing loans and that the fixed-interest period of these loans has an impact on the banks' overall exposure to interest rate risk. This last finding is not in line with active interest rate risk management.

Highlights

Banks usually grant long-term loans and finance their operations with short-term deposits
In our empirical study of German banks for the period 2011Q4–2017Q2, we find evidence that banks actively manage their exposure to interest rate risk in the short run
We further show that customers' fixed-interest period preferences are a determinant of banks' on-balance-sheet interest rate risk exposure, and they have an impact on banks' overall interest rate risk exposure as well

Summary

| INTRODUCTION

Banks usually grant long-term loans and finance their operations with short-term deposits. Where Δfipt is (again, but this time the cross-sectional weighted average over the banks in Germany) the change in the average of the fixed-interest period of new housing loans granted in t and the variable Δstt is the change in the steepness of the term structure, measured as the spread between 1-year and 10-year German government bond yields (zero coupon bonds). We estimate this relationship in first differences because the levels of the variables do not seem to be stationary (see Table A1 in Appendix A). The interest level is measured as the rate of the respective bank for housing loans with a fixed-interest period of 5 to 10 years (rlbg,t,i)

| RESULTS

Results

Findings

| CONCLUSION