Evidence on the Efficacy of Market Risk Disclosures by Commercial Banks
37 Pages Posted: 14 Jun 1999
Date Written: April 1999
This paper documents evidence on the efficacy of maturity gap disclosures and interest rate risk policy disclosures of commercial bank holding companies in indicating their interest rate risk exposures. Using data from the Federal Reserve Y-9 reports over 1991-1996, we find a significant relation between maturity gap and future change in net interest income indicating that gap data are useful in assessing the loss potential of banks' interest rate risk positions. This is contrary to the claim of some banks that gap data are not useful indicators of interest rate risk. The finding mitigates concerns about the usefulness of the SEC (1997) market risk disclosure requirements and is pertinent to the SEC's scheduled review of these requirements.
We also find that gap is negatively related to interest rate sensitivity of banks contrary to the nominal contracting hypothesis though this relation is significant only in three out of the six years examined. Taken together, the evidence suggests that inferences about market risks based on interest rate sensitivity alone may be misleading.
Finally, we find no support for the hypothesis that qualitative policy disclosures help distinguish hedgers from speculators.
JEL Classification: M41, M45, G21, G38
Suggested Citation: Suggested Citation