Abstract
We study how modern finance has affected banks interest rate risk management and how the decision hedge interest rate risk affects the transmission of monetary policy, the value of its equity, its lending behaviour, and, hence, the investment decisions of the firms to which they lend. Financial intermediation often exposes banks to interest rate risks by creating mismatches in the maturity structure and repricing terms of their assets and liabilities. Unlike credit risk which a bank can be more or less exposed to but requires credit derivatives to completely remove, it is possible for a bank to completely insulate itself from interest rate risk without trading derivatives. While banks may use interest rate derivatives to manage their interest rate risk exposure, they may also use on-balance sheet techniques, that is, managing the difference in maturity and repricing terms of their assets and liabilities. Before reviewing the literature that focuses on the effects of this decision, we begin with a discussion of the papers that seek to uncover the methods and motives for managing interest rate risk.
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Notes
- 1.
See Abad et al. (2016) for a detailed description of the data reported under EMIR.
- 2.
See Esposito et al. (2015) for details on these calculations and weighting factors for each maturity bucket.
- 3.
See Chap. 5: Global Banking, for a detailed description of the channels through which monetary policy is transmitted and the bank lending channel in particular.
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Bilan, A., Degryse, H., O’Flynn, K., Ongena, S. (2019). Interest Rate Risk. In: Banking and Financial Markets. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-26844-2_3
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DOI: https://doi.org/10.1007/978-3-030-26844-2_3
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