The Management of Interest Rate Risk During the Crisis: Evidence from Italian Banks

42 Pages Posted: 22 Nov 2013

Date Written: September 20, 2013

Abstract

Changes in interest rates constitute a major source of risk for banks’ business activity and can diversely affect their financial conditions and performance. We use a unique dataset to analyse Italian banks’ exposure to interest rate risk during the crisis, relying on the standardized duration gap approach proposed by the Basel Committee. We provide evidence that banks managed their overall interest rate risk exposure by means of on-balance-sheet restructuring complemented by hedging with financial derivatives. But the complementary relationship between risk-management decisions differs significantly across banks. The different impact of a future increase in interest rates on banks’ economic value will be a matter of concern for policymakers when they return to a less accommodative monetary policy stance.

Keywords: interest rate risk, derivatives, hedging, financial crisis

JEL Classification: E43, G21

Suggested Citation

Esposito, Lucia and Nobili, Andrea and Ropele, Tiziano, The Management of Interest Rate Risk During the Crisis: Evidence from Italian Banks (September 20, 2013). Bank of Italy Temi di Discussione (Working Paper) No. 933. Available at SSRN: https://ssrn.com/abstract=2358457 or http://dx.doi.org/10.2139/ssrn.2358457

Lucia Esposito

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrea Nobili (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Tiziano Ropele

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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