Who Bears Interest Rate Risk?

62 Pages Posted: 1 Nov 2017 Last revised: 2 Sep 2018

See all articles by Peter Hoffmann

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research

Sam Langfield

European Central Bank

Federico Pierobon

European Central Bank

Guillaume Vuillemey

HEC Paris

Multiple version iconThere are 2 versions of this paper

Date Written: August 30, 2018

Abstract

We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. In contrast to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector.

Keywords: Interest Rate Risk, Banking, Risk Management, Hedging

JEL Classification: G21, E43, E44

Suggested Citation

Hoffmann, Peter and Langfield, Sam and Pierobon, Federico and Vuillemey, Guillaume, Who Bears Interest Rate Risk? (August 30, 2018). Available at SSRN: https://ssrn.com/abstract=3062435 or http://dx.doi.org/10.2139/ssrn.3062435

Peter Hoffmann (Contact Author)

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Sam Langfield

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Federico Pierobon

European Central Bank ( email )

Germany

Guillaume Vuillemey

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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