How Do Banks and Households Manage Interest Rate Risk? Evidence from Mortgage Applications and Banks’ Responses

50 Pages Posted: 8 Jun 2018

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: June 8, 2018

Abstract

We exploit a unique dataset that features both un-intermediated mortgage requests and independent responses from multiple banks to each request. We show that households typically are not prudent risk managers, but prioritize minimizing current mortgage payments over insurance against future rate increases. Contrary to assumptions in the previous literature, we find that banks do also influence contracted rate fixation periods. They trade off their own exposure to interest rate risk against household requests and against credit risk.

Keywords: Interest rate risk, credit risk, maturity mismatch, duration, fixation period, repricing frequency, fixed-rate mortgage, adjustable rate mortgage

JEL Classification: D14, E43, G21

Suggested Citation

Basten, Christoph and Guin, Benjamin and Koch, Catherine, How Do Banks and Households Manage Interest Rate Risk? Evidence from Mortgage Applications and Banks’ Responses (June 8, 2018). Bank of England Working Paper No. 733. Available at SSRN: https://ssrn.com/abstract=3192943 or http://dx.doi.org/10.2139/ssrn.3192943

Christoph Basten

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 (Contact Author)

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

Register to save articles to
your library

Register

Paper statistics

Downloads
19
Abstract Views
197
PlumX Metrics