Looking Beyond Banks’ Average Interest Rate Risk: Determinants of High Exposures

41 Pages Posted: 15 Apr 2014 Last revised: 15 Apr 2016

See all articles by Oliver Entrop

Oliver Entrop

University of Passau

Ludwig von la Hausse

University of Augsburg

Marco Wilkens

University of Augsburg

Date Written: 2016

Abstract

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

Entrop, Oliver and von la Hausse, Ludwig and Wilkens, Marco, Looking Beyond Banks’ Average Interest Rate Risk: Determinants of High Exposures (2016). Quarterly Review of Economics and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2424705 or http://dx.doi.org/10.2139/ssrn.2424705

Oliver Entrop

University of Passau ( email )

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

Ludwig Von la Hausse (Contact Author)

University of Augsburg ( email )

Universitaetsstrasse 16
Augsburg, 86159
Germany
+498215984118 (Phone)
+498215984223 (Fax)

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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