Do Banks Hedge Using Interest Rate Swaps?

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