Derivatives, Portfolio Composition and Bank Holding Company


39 Pages Posted: 23 Jan 1997

See all articles by Beverly Hirtle

Beverly Hirtle

Federal Reserve Bank of New York - Banking Studies Department

Date Written: November 1996


This paper examines the role played by derivatives in determining the interest rate sensitivity of bank holding companies' (BHCs) common stock, controlling for the influence of on-balance sheet activities and other bank- specific characteristics. The major result of the analysis suggests that derivatives have played a significant role in shaping banks' interest rate risk exposures in recent years. For the typical bank holding company in the sample, increases in the use of interest rate derivatives corresponded to greater interest rate risk exposure during the 1991-94 period. This relationship is particularly strong for bank holding companies that serve as derivatives dealers and for smaller, end user BHCs. During earlier years, however, there is no significant relationship between the extent of derivatives activities and interest rate risk exposure. There are two plausible interpretations of the relationship between interest rate derivative activity and interest rate risk exposure in the latter part of the sample period: one interpretation suggests that derivatives tend to enhance interest rate risk exposure for the typical BHC in the sample, while the other suggests that derivatives may be used to partially offset high interest rate risk exposures arising from other activities. The analysis provides support for the first of these two interpretations.

JEL Classification: D81, G21

Suggested Citation

Hirtle, Beverly, Derivatives, Portfolio Composition and Bank Holding Company (November 1996). 96-43, Available at SSRN: or

Beverly Hirtle (Contact Author)

Federal Reserve Bank of New York - Banking Studies Department ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7544 (Phone)
212-720-8363 (Fax)

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