Interest Rate Derivatives at Commercial Banks: An Empirical Investigation

University of Michigan Working Paper

FDIC Center for Financial Research Working Paper No. 2006-02

58 Pages Posted: 18 Mar 2005

See all articles by Amiyatosh Purnanandam

Amiyatosh Purnanandam

University of Michigan, Stephen M. Ross School of Business

Date Written: June 26, 2006

Abstract

I analyze the effects of bank characteristics and macroeconomic shocks on interest rate risk-management behavior of commercial banks. My findings are consistent with hedging theories based on cost of financial distress and costly external financing. Banks with higher probability of financial distress manage their interest rate risk more aggressively, both by means of on-balance sheet and off-balance sheet instruments. As compared to the derivative users, the derivative non-user banks adopt conservative asset-liability management policies in tighter monetary policy regimes. Finally, I show that the derivative non-user bank's lending volume declines significantly with the contraction in the money supply. Derivative users, on the other hand, remain immune to the monetary policy shocks. My findings suggest that a potential benefit of derivatives usage is to minimize the effect of external shocks on a firm's operating policies

Keywords: Risk management, hedging, financial distress, derivatives

Suggested Citation

Purnanandam, Amiyatosh, Interest Rate Derivatives at Commercial Banks: An Empirical Investigation (June 26, 2006). University of Michigan Working Paper, FDIC Center for Financial Research Working Paper No. 2006-02, Available at SSRN: https://ssrn.com/abstract=389760 or http://dx.doi.org/10.2139/ssrn.389760

Amiyatosh Purnanandam (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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