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Quantifying the Interest Rate Risk of Banks: Assumptions Do Matter

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  • Oliver Entrop
  • Marco Wilkens
  • Alexander Zeisler

Abstract

This paper analyses the robustness of the standardised framework proposed by the Basel Committee on Banking Supervision (2004b) to quantify the interest rate risk of banks. We generalise this framework and study the change in the estimated level of interest rate risk if the strict assumptions of the standardised framework are violated. Using data on the German universal banking system, we find that estimates of the interest rate risk are very sensitive to the framework's assumptions. We conclude that the results obtained using the standardised framework in its current specification should be treated with caution when used for supervisory and risk management purposes.

Suggested Citation

  • Oliver Entrop & Marco Wilkens & Alexander Zeisler, 2009. "Quantifying the Interest Rate Risk of Banks: Assumptions Do Matter," European Financial Management, European Financial Management Association, vol. 15(5), pages 1001-1018, November.
    • Handle: RePEc:bla:eufman:v:15:y:2009:i:5:p:1001-1018
    DOI: 10.1111/j.1468-036X.2009.00509.x
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    References listed on IDEAS

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    2. Laura Parisi & Igor Gianfrancesco & Camillo Gilberto & Paolo Giudici, 2015. "Monetary transmission models for bank interest rates," DEM Working Papers Series 101, University of Pavia, Department of Economics and Management.
    3. John Ashton & Andros Gregoriou & Jerome V. Healy, 2013. "The relative influence of price and choice factors on retail deposit quantities," Working Papers 13006, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    4. Chattha, Jamshaid Anwar & Alhabshi, Syed Musa, 2020. "Benchmark rate risk, duration gap and stress testing in dual banking systems," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    5. Paolo Giudici & Laura Parisi, 2015. "Dynamic models for monetary transmission," DEM Working Papers Series 106, University of Pavia, Department of Economics and Management.

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