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

The IUP Journal of Financial Risk Management, Vol. IX, No. 4, pp. 27-51, December 2012

Posted: 12 Dec 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

Tobia Rebonato

Department of Economic and Managerial Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: December 11, 2012

Abstract

The present study aims to ascertain whether a relationship exists between liquidity risk and the interest rate risk of credit institutions. By analyzing the balance sheet of a small Italian bank during the years 2009 and 2010, 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, were outlined. Gaps identified in literature were filled by shedding light on how a set of decisions designed mainly to reduce 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. The main findings of the study 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.

Suggested Citation

Baldan, Cinzia and Zen, Francesco and Rebonato, Tobia, Liquidity Risk and Interest Rate Risk on Banks: Are they Related? (December 11, 2012). The IUP Journal of Financial Risk Management, Vol. IX, No. 4, pp. 27-51, December 2012. Available at SSRN: https://ssrn.com/abstract=2187687

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

Tobia Rebonato

Department of Economic and Managerial Sciences ( email )

Via del Santo, 33
Padova, 35123
Italy

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