Non-Maturing Assets and Liabilities of Banks: Valuation and Risk Measurement
40 Pages Posted: 24 Aug 2009
Date Written: April 30, 2009
Non-maturing banking products are important asset and liability positions of banks. Their complexity inter alia arises from a non-trivial pass-through from market to product rates which makes the valuation and risk analysis challenging for both banks and banking supervisors. Based on a large data set, this paper provides a comprehensive analysis of the valuation and interest rate risk measurement of these products in the risk-neutral valuation framework of Jarrow and van Deventer (1998). We apply 6 term structure models and 4 interest rate pass-through models and estimate for each of these 24 model combinations the value and interest rate risk of 13 non-maturing product categories for up to 400 German banks on an individual bank level. We find that the choice of the term structure and the pass-through model is of limited importance for the valuation of non-maturing banking products. For ranking banks according to the interest rate risk of their products the pass-through process is of specific relevance. When the level of the interest rate risk is to be estimated, additionally an advanced term structure model should be chosen.
Keywords: Interest rate risk, term structure model, interest rate pass-through, banking supervision, German financial institutions
JEL Classification: G13, G18, G21
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