Abstract
AbstractWe 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. Specifically, they adjust their exposure to the earning opportunities presented by this risk, take account of their regulatory situation, and manage this exposure using interest swaps. We also find that the fixed‐interest period of housing loans has an impact on the banks' overall exposure to interest rate risk. This last finding, in combination with the empirical evidence that customer preferences predominantly determine the fixed‐interest period of these loans, is not in line with active interest rate risk management.
Highlights
Banks grant long-term loans and finance themselves with short-term deposits
We investigate whether banks actively manage their exposure to interest rate risk in the short run
In line with previous analyses, we find that the regulatory threshold of 20% has a strong influence: If a bank has an interest rate risk exposure exceeding this threshold in the previous quarter, the bank – on average – reduces its exposure in the following quarter
Summary
Banks grant long-term loans and finance themselves with short-term deposits. This maturity mismatch exposes the banks to interest rate risk which makes them vulnerable to sudden increases in the interest level. This issue is relevant for banking supervisors, but for macro-prudential supervisors as well because – unlike credit risk which has a huge bank-specific component – this risk is barely diversifiable (see Hellwig (1994)) and, affects many banks at the same time and in same way. We want to deal with the question of whether banks actively manage this risk in the short run. The answer to this question is not as trivial as it may sound: Instead of an active management of the exposure to interest rate risk, a bank may treat interest rate risk as a byproduct of the loan granting business and let the exposure to this risk randomly fluctuate, depending on the demand for long-term loans
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