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

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.

Keywords: interest rate risk in the banking book, fixed-interest period of housing loans, interest swaps, regulation of interest rate risk

JEL Classification: G21