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
Date Written: November 9, 2020
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: Suggested Citation