On the Independence of Assets and Liabilities: Evidence from U.S. Commercial Banks, 1990-2005
49 Pages Posted: 29 Apr 2009
Date Written: March 1, 2008
Traditional asset-liability management techniques limit banks' abilities to structure their balance sheets-but more recently, financial innovations have allowed banks the chance to manage interest rate risk without constraining their asset-liability choices. Using canonical correlation analysis, we examine how the relationships between asset and liability accounts at U.S. commercial banks changed between 1990 and 2005. Importantly, we show that asset-liability linkages are weaker for banks that are intensive users of risk-mitigation strategies such as interest rate swaps and adjustable loans. Perhaps surprisingly, we find that asset-liability linkages are stronger at large banks than at small banks, although these size-based differences have diminished over time, both because of increased asset-liability linkages at small banks and decreased linkages at large banks.
Keywords: asset-liability management, canonical correlation, commercial banks, deregulation, technological change
JEL Classification: G21, G32
Suggested Citation: Suggested Citation