Looking Beyond Banks’ Average Interest Rate Risk: Determinants of High Exposures
41 Pages Posted: 15 Apr 2014 Last revised: 15 Apr 2016
Date Written: 2016
This paper studies the magnitude and determinants of interest rate risk (IRR) of listed U.S. bank holding companies. As our first contribution, we test whether banks avoid exposures to IRR as prescribed in classic bank hedging literature. To do so, we use a state space model and Kalman filter techniques to estimate time-series of interest rate betas from bank stock returns. While the interest rate exposures of banks average close to zero, we find that individual banks at times exhibit high and significant exposures to interest rate risk. As our second contribution, we relate these high betas to lagged bank characteristics from accounting data, applying logit regressions and unconditional quantile regressions. We find that high exposures are partly systemic and comove with bank characteristics like size or leverage. This has implications for the monitoring of interest rate risk by regulators and investors as well as for the ongoing debates on the appropriate capitalization of banks.
Keywords: interest rate risk, banks, tail exposures, financial crisis
JEL Classification: G21, E43, G14
Suggested Citation: Suggested Citation