Market Timing, Maturity Mismatch, and Risk Management: Evidence from the Banking Industry

Deutsche Bundesbank Discussion Paper 56/2013

47 Pages Posted: 17 Feb 2014  

Benedikt Ruprecht

Deutsche Bundesbank

Oliver Entrop

University of Passau

Thomas K. Kick

Deutsche Bundesbank

Marco Wilkens

University of Augsburg

Multiple version iconThere are 2 versions of this paper

Date Written: February 10, 2014

Abstract

We investigate financial intermediaries’ interest rate risk management as the simultaneous decision of on-balance-sheet exposure and interest rate swap use. Our findings show that both decisions are substitute risk management strategies. A higher likelihood of bank distress makes banks reduce their on-balance sheet interest rate exposure and simultaneously intensify their swap use. Exogeneity tests indicate that both decisions are only endogenous to each other for banks that start using swaps for the first time. For other banks, the maturity gap is endogenous to the decision to use swaps, but the reverse relationship is exogenous. For banks with trading activity, both decisions are exogenous to each other. We interpret these findings as the maturity gap being largely determined by customer liquidity needs, whereas the decision to use swaps relies on compliance with the interest rate risk regulation. Although hedging motives dominate, we find selective hedging behavior in swap use driven by the slope of the yield curve as well as by funding uncertainty.

Keywords: Duration gap, Interest rate swaps, Selective hedging

JEL Classification: G21, G32, G33

Suggested Citation

Ruprecht, Benedikt and Entrop, Oliver and Kick, Thomas K. and Wilkens, Marco, Market Timing, Maturity Mismatch, and Risk Management: Evidence from the Banking Industry (February 10, 2014). Deutsche Bundesbank Discussion Paper 56/2013. Available at SSRN: https://ssrn.com/abstract=2396922 or http://dx.doi.org/10.2139/ssrn.2396922

Benedikt Ruprecht (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+49 69 9566 - 8618 (Phone)

Oliver Entrop

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany
+49 851 509 2460 (Phone)
+49 851 509 2462 (Fax)

Thomas K. Kick

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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