Unstable Inference from Banks' Stable Net Interest Margins

56 Pages Posted: 21 Jun 2022

See all articles by Juliane Begenau

Juliane Begenau

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Erik Stafford

Harvard Business School - Finance Unit

Date Written: April 1, 2022

Abstract

This paper shows that stable net-interest margins of banks are uninformative about banks' interest rate exposure. We show that neither deposits nor market power are essential for achieving stable net-interest margins (NIM) in long-short fixed income portfolios. We show that matching interest income and interest expenses sensitivities to market rate movements is a consequence of achieving stable NIM, not necessarily the causal mechanism that allows it. Stable NIM does not imply near zero interest rate risk according to standard risk measures. Common measures of imperfect pass-through of market rates to bank deposit rates commingle two distinct mechanisms: (1) intentional rate setting and (2) mechanical consequence of comparing the changes in the periodic interest earned on positive maturity fixed coupon portfolios to changes in a short-term interest rate. The mechanical maturity consequence dominates the measured imperfect pass-through of market rates on time deposits.

Keywords: Banks, Net-Interest Margins, Interest Rate Risk, Hedging

JEL Classification: G21, G32, E34

Suggested Citation

Begenau, Juliane and Stafford, Erik, Unstable Inference from Banks' Stable Net Interest Margins (April 1, 2022). Available at SSRN: https://ssrn.com/abstract=4136866 or http://dx.doi.org/10.2139/ssrn.4136866

Juliane Begenau (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
United States
6507245661 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Erik Stafford

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-8064 (Phone)
617-496-7357 (Fax)

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