Risk Management in Financial Institutions

69 Pages Posted: 11 Jun 2019 Last revised: 29 Jul 2019

See all articles by Adriano A. Rampini

Adriano A. Rampini

Duke University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

S. Viswanathan

Duke University - Fuqua School of Business; Duke University - Department of Economics

Guillaume Vuillemey

HEC Paris

Multiple version iconThere are 3 versions of this paper

Date Written: June 2019

Abstract

We study risk management in financial institutions using data on hedging of interest rate and foreign exchange risk. We find strong evidence that institutions with higher net worth hedge more, controlling for risk exposures, both across institutions and within institutions over time. For identification, we exploit net worth shocks resulting from loan losses due to drops in house prices. Institutions that sustain such shocks reduce hedging significantly relative to otherwise similar institutions. The reduction in hedging is differentially larger among institutions with high real estate exposure. The evidence is consistent with the theory that financial constraints impede both financing and hedging.

Keywords: Derivatives, Financial constraints, financial institutions, Foreign exchange risk, interest rate risk, Risk management

JEL Classification: D92, E44, G21, G32

Suggested Citation

Rampini, Adriano A. and Viswanathan, S. and Vuillemey, Guillaume, Risk Management in Financial Institutions (June 2019). CEPR Discussion Paper No. DP13787, Available at SSRN: https://ssrn.com/abstract=3401874

Adriano A. Rampini (Contact Author)

Duke University ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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S. Viswanathan

Duke University - Fuqua School of Business ( email )

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United States
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Duke University - Department of Economics

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Guillaume Vuillemey

HEC Paris ( email )

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France

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