Evidence on Interest Rate Risk Management and Derivatives Usage by Commercial Banks

Abstract

This study provides evidence on the Interest Rate Risk (IRR) management activities of commercial banks including their use of derivatives. We find that (i) banks primarily focus on managing interest rate sensitivity of net income rather than the interest rate sensitivity of stock returns, (ii) the level of IRR taken by banks is directly related to liquidity, and inversely related to managerial quality and bank size, (iii) derivative users as a group have lower mean and median exposure than non-users, and (iv) for the majority of users, derivative usage reduces exposure. These findings are inconsistent with the view that derivatives threaten the viability of the banking system.

JEL Classification: G32, M41, M43