How Do Banks and Households Manage Interest Rate Risk? Evidence from the Swiss Mortgage Market

40 Pages Posted: 27 Sep 2017

See all articles by Christoph Basten

Christoph Basten

University of Zurich; Swiss Finance Institute; CESifo (Center for Economic Studies and Ifo Institute)

Benjamin Guin

Bank of England

Cathérine Koch

Bank for International Settlements (BIS)

Date Written: September 13, 2017

Abstract

We exploit a unique data set that features both un-intermediated mortgage requests and independent offers from multiple banks for each request. We show that households typically are not prudent risk managers but prioritize the minimization of current mortgage payments over the risk of possible hikes in future mortgage payments. We also provide evidence that banks do influence the contracted mortgage rate fixation periods, trading off their own exposure to interest rate risk against the borrowers’ affordability and credit risk. Our results challenge the implicit assumption of the existing mortgage choice literature whereby fixation periods are determined entirely by households.

Keywords: Fixed-Rate Mortgage (FRM), Adjustable-Rate Mortgage (ARM), fixation period, maturity mismatch, interest rate risk, credit risk, duration

JEL Classification: D120, E430, G210

Suggested Citation

Basten, Christoph and Guin, Benjamin and Koch, Catherine, How Do Banks and Households Manage Interest Rate Risk? Evidence from the Swiss Mortgage Market (September 13, 2017). CESifo Working Paper Series No. 6649. Available at SSRN: https://ssrn.com/abstract=3043072

Christoph Basten (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute

c/o University of Geneva
40 Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Benjamin Guin

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Catherine Koch

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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