Do Banks Hedge Using Interest Rate Swaps?

21 Pages Posted: 19 Apr 2023 Last revised: 3 May 2023

See all articles by Lihong McPhail

Lihong McPhail

Commodity Futures Trading Commission (CFTC)

Philipp Schnabl

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Bruce Tuckman

New York University (NYU) - Leonard N. Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 10, 2023

Abstract

We ask whether banks use interest rate swaps to hedge the interest rate risk of their assets, primarily loans and securities. To this end, we use regulatory data on individual swap positions for the largest 250 U.S. banks. We find that the average bank has a large notional amount of $434 billion. But after accounting for offsetting swap positions, the average bank has essentially no exposure to interest rate risk: a 100-basis-point increase in rates increases the value of its swaps by 0.1% of equity. There is variation across banks, with some bank swap positions decreasing and some increasing with rates, but aggregating swap positions at the level of the banking system reveals that most swap exposures are offsetting. Therefore, as a description of prevailing practice, we conclude that swap positions are not economically significant in hedging the interest rate risk of bank assets.

Keywords: banks, interest rate risk, interest rate swaps, swaps, derivatives, hedging strategies, DV01

JEL Classification: G21, G32

Suggested Citation

McPhail, Lihong and Schnabl, Philipp and Tuckman, Bruce, Do Banks Hedge Using Interest Rate Swaps? (April 10, 2023). Available at SSRN: https://ssrn.com/abstract=4414355 or http://dx.doi.org/10.2139/ssrn.4414355

Lihong McPhail (Contact Author)

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

Philipp Schnabl

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/pschnabl/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Bruce Tuckman

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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