Disproportionate Costs of Uncertainty: Small Bank Hedging and Dodd-Frank

Accepted at Journal of Futures Markets

42 Pages Posted: 3 Feb 2019 Last revised: 11 Jan 2021

See all articles by Raymond Kim

Raymond Kim

W.A. Franke College of Business, Northern Arizona University

Date Written: November 9, 2020

Abstract

Uncertainty in banking regulation may impose widespread economic costs by increasing financial constraints on credit availability. Four years of Dodd Frank uncertainty over undecided risk weightings increased regulatory uncertainty for smaller banks, restricting "vanilla" interest rate hedging activities. This paper uses newly reported mortgage banking data as an identification strategy and finds that when costs of uncertainty are removed, small banks hedge 97-120% more interest rate risk while mortgage securitization income increases by 65.2% compared to large banks. These findings support the need for tailored regulations that considers the higher costs of regulatory uncertainty for smaller banks.

Keywords: Costs of uncertainty, interest rate derivatives, Dodd-Frank, interest rate swaps, mortgages held for sale, interest rate locks, banking regulation, hedging, risk management, community banks

JEL Classification: G21, G28, G32

Suggested Citation

Kim, Raymond, Disproportionate Costs of Uncertainty: Small Bank Hedging and Dodd-Frank (November 9, 2020). Accepted at Journal of Futures Markets, Available at SSRN: https://ssrn.com/abstract=3320224 or http://dx.doi.org/10.2139/ssrn.3320224

Raymond Kim (Contact Author)

W.A. Franke College of Business, Northern Arizona University ( email )

101 E. McConnell Drive
Flagstaff, AZ 86011
United States

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