The Management of Interest Rate Risk During the Crisis: Evidence from Italian Banks
42 Pages Posted: 22 Nov 2013
Date Written: September 20, 2013
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: Suggested Citation