Does Prudential Regulation Contribute to Effective Measurement and Management of Interest Rate Risk? Evidence From Italian Banks

13 Pages Posted: 3 Feb 2021

See all articles by Rosaria Cerrone

Rosaria Cerrone

University of Salerno Department of Management and Innovation Systems

Rosa Cocozza

University of Naples Federico II - Faculty of Economics

Domenico Curcio

University of Naples Federico II; Arcelli Centre for Monetary and Financial Studies (CASMEF)

Igor Gianfrancesco

Luiss Guido Carli University; Banca Popolare di Spoleto

Date Written: 2017

Abstract

This paper contributes to prior literature and to the current debate concerning recent revisions of the regulatory approach to measuring bank exposure to interest rate risk in the banking book by focusing on assessment of the appropriate amount of capital banks should set aside against this specific risk. We first discuss how banks might develop internal measurement systems to model changes in interest rates and measure their exposure to interest rate risk that are more refined and effective than are regulatory methodologies. We then develop a backtesting framework to test the consistency of methodology results with actual bank risk exposure. Using a representative sample of Italian banks between 2006 and 2013, our empirical analysis supports the need to improve the standardized shock currently enforced by the Basel Committee on Banking Supervision. It also provides useful insights for properly measuring the amount of capital to cover interest rate risk that is sufficient to ensure both financial system functioning and banking stability.

Keywords: Bank regulation, Interest rate risk, Monte Carlo simulations, Historical simulations, Backtesting

JEL Classification: G21, G28, G32

Suggested Citation

Cerrone, Rosaria and Cocozza, Rosa and Curcio, Domenico and Gianfrancesco, Igor, Does Prudential Regulation Contribute to Effective Measurement and Management of Interest Rate Risk? Evidence From Italian Banks (2017). Journal of Financial Stability, Vol. 30, 2017, Available at SSRN: https://ssrn.com/abstract=3743125

Rosaria Cerrone

University of Salerno Department of Management and Innovation Systems ( email )

Via Giovanni Paolo II
Fisciano, Salerno 84084
Italy

Rosa Cocozza (Contact Author)

University of Naples Federico II - Faculty of Economics ( email )

Via Cintia Monte S. Angelo
Napoli, 80126
Italy
+39/81675083 (Phone)

HOME PAGE: http://www.docenti.unina.it/rosa.cocozza

Domenico Curcio

University of Naples Federico II ( email )

Via Cintia, Monte S. Angelo
Naples, Naples 80126
Italy
+393402651322 (Phone)

Arcelli Centre for Monetary and Financial Studies (CASMEF) ( email )

Viale Romania 32
Rome, 00197
Italy

Igor Gianfrancesco

Luiss Guido Carli University

viale Romania 32
Roma, 00198
Italy

Banca Popolare di Spoleto ( email )

PIazza Pianciani 5
Spoleto, PG 06049
Italy

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