Liquidity Risk and Interest Rate Risk on Banks: Are They Related?

The IUP Journal of Financial Risk Management, Forthcoming

37 Pages Posted: 28 Sep 2012 Last revised: 21 Oct 2012

See all articles by Cinzia Baldan

Cinzia Baldan

University of Padova, Department of Economic and Managerial Sciences; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN)

Francesco Zen

University of Padua - Department of Economics and Management

Multiple version iconThere are 2 versions of this paper

Date Written: 2012

Abstract

The study aims at ascertaining whether a relationship exists between the liquidity risk and the interest rate risk of credit institutions. By analysing the balance sheet of a small Italian bank during the years 2009 and 2010, we outlined its liquidity profile, the variables that influenced its dynamics and their effects on the bank’s global management, with particular attention to the interest margin and the interest rate risk in the banking book.

We would like to fill a gap identified in the literature, shedding light on how a set of decisions designed mainly to reduce the liquidity risk and comply with the new parameters established by the Basel III Framework enables a more effective management of the regulatory capital and helps the bank to achieve a solid balance between profitability and solvency.

Our main findings demonstrate that the bank succeeded in modifying its liquidity profile in order to comply with the incoming constraints imposed by the Basel III framework; the actions taken to reduce the liquidity risk also lowered its interest margin, but also enabled the bank to reduce the amount of capital absorbed by the interest rate risk, giving rise to a globally positive effect.

Keywords: Asset and Liability Management, Basel III Framework, Integration of Liquidity Risk and Interest Rate Risk, Risk Management

JEL Classification: G21, G32, E47, F37

Suggested Citation

Baldan, Cinzia and Zen, Francesco, Liquidity Risk and Interest Rate Risk on Banks: Are They Related? (2012). The IUP Journal of Financial Risk Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2152320 or http://dx.doi.org/10.2139/ssrn.2152320

Cinzia Baldan (Contact Author)

University of Padova, Department of Economic and Managerial Sciences ( email )

via Del Santo 33
Padova, 35123
Italy
+39.(0)49.827.4047 (Phone)

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN) ( email )

via Berengario 51
Modena, modena I-41100
Italy

Francesco Zen

University of Padua - Department of Economics and Management ( email )

Via del Santo, 33
Padova, 35123
Spain

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