IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v35y2011i2p282-289.html
   My bibliography  Save this article

Banks' exposure to interest rate risk, their earnings from term transformation, and the dynamics of the term structure

Author

Listed:
  • Memmel, Christoph

Abstract

We use a unique dataset of German banks' exposure to interest rate risk to derive the following statements about their exposure to this risk and their earnings from term transformation. The systematic factor for the exposure to interest rate risk moves in sync with the shape of the term structure. At bank level, however, the time variation of the exposure is largely determined by idiosyncratic effects. Over time, changes in earnings from term transformation have a large impact on interest income. Across banks, however, the earnings from term transformation do not seem to be a decisive factor for the interest margin.

Suggested Citation

  • Memmel, Christoph, 2011. "Banks' exposure to interest rate risk, their earnings from term transformation, and the dynamics of the term structure," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 282-289, February.
    • Handle: RePEc:eee:jbfina:v:35:y:2011:i:2:p:282-289
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(10)00304-3
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Maudos, Joaquín & Solís, Liliana, 2009. "The determinants of net interest income in the Mexican banking system: An integrated model," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1920-1931, October.
    2. Alessandri, Piergiorgio & Drehmann, Mathias, 2010. "An economic capital model integrating credit and interest rate risk in the banking book," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 730-742, April.
    3. Gloria M. Soto Pacheco & Cristóbal González & Laura Ballester & Román Ferrer, 2009. "Determinants of interest rate exposure of Spanish banking industry," Working Papers. Serie EC 2009-07, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    4. Christoph Memmel, 2008. "Which interest rate scenario is the worst one for a bank? Evidence from a tracking bank approach for German savings and cooperative banks," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 1(1), pages 85-104.
    5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    6. Viale, Ariel M. & Kolari, James W. & Fraser, Donald R., 2009. "Common risk factors in bank stocks," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 464-472, March.
    7. Purnanandam, Amiyatosh, 2007. "Interest rate derivatives at commercial banks: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1769-1808, September.
    8. Maudos, Joaquin & Fernandez de Guevara, Juan, 2004. "Factors explaining the interest margin in the banking sectors of the European Union," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2259-2281, September.
    9. Drehmann, Mathias & Sorensen, Steffen & Stringa, Marco, 2010. "The integrated impact of credit and interest rate risk on banks: A dynamic framework and stress testing application," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 713-729, April.
    10. William B English, 2002. "Interest rate risk and bank net interest margins," BIS Quarterly Review, Bank for International Settlements, December.
    11. Gregory E. Sierra & Timothy J. Yeager, 2004. "What does the Federal Reserve's economic value model tell us about interest rate risk at U.S. community banks?," Review, Federal Reserve Bank of St. Louis, vol. 86(Nov), pages 45-60.
    12. Schich, Sebastian T., 1997. "Schätzung der deutschen Zinsstrukturkurve," Discussion Paper Series 1: Economic Studies 1997,04, Deutsche Bundesbank.
    13. Yourougou, Pierre, 1990. "Interest-rate risk and the pricing of depository financial intermediary common stock : Empirical evidence," Journal of Banking & Finance, Elsevier, vol. 14(4), pages 803-820, October.
    14. Wilkens, Marco & Memmel, Christoph & Entrop, Oliver & Zeisler, Alexander, 2008. "Analyzing the interest rate risk of banks using time series of accounting-based data: evidence from Germany," Discussion Paper Series 2: Banking and Financial Studies 2008,01, Deutsche Bundesbank.
    15. Marc†Gregor Czaja & Hendrik Scholz & Marco Wilkens, 2010. "Interest Rate Risk Rewards in Stock Returns of Financial Corporations: Evidence from Germany," European Financial Management, European Financial Management Association, vol. 16(1), pages 124-154, January.
    16. Donald R. Fraser & Jeff Madura & Robert A. Weigand, 2002. "Sources of Bank Interest Rate Risk," The Financial Review, Eastern Finance Association, vol. 37(3), pages 351-367, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Esposito, Lucia & Nobili, Andrea & Ropele, Tiziano, 2015. "The management of interest rate risk during the crisis: Evidence from Italian banks," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 486-504.
    2. Chaudron, Raymond F.D.D., 2018. "Bank's interest rate risk and profitability in a prolonged environment of low interest rates," Journal of Banking & Finance, Elsevier, vol. 89(C), pages 94-104.
    3. Raymond Chaudron, 2016. "Bank profitability and risk taking in a prolonged environment of low interest rates: a study of interest rate risk in the banking book of Dutch banks," DNB Working Papers 526, Netherlands Central Bank, Research Department.
    4. Paolo Giudici & Laura Parisi, 2015. "Dynamic models for monetary transmission," DEM Working Papers Series 106, University of Pavia, Department of Economics and Management.
    5. 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.
    6. Christoph Memmel & Andrea Schertler, 2013. "Bank management of the net interest margin: new measures," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(3), pages 275-297, September.
    7. Foos, Daniel & Lütkebohmert, Eva & Markovych, Mariia & Pliszka, Kamil, 2017. "Euro area banks' interest rate risk exposure to level, slope and curvature swings in the yield curve," Discussion Papers 24/2017, Deutsche Bundesbank.
    8. Molyneux, Philip & Pancotto, Livia & Reghezza, Alessio & Rodriguez d'Acri, Costanza, 2022. "Interest rate risk and monetary policy normalisation in the euro area," Journal of International Money and Finance, Elsevier, vol. 124(C).
    9. Entrop, Oliver & Memmel, Christoph & Ruprecht, Benedikt & Wilkens, Marco, 2015. "Determinants of bank interest margins: Impact of maturity transformation," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 1-19.
    10. Schmidhammer, Christoph & Hille, Vanessa & Wiedemann, Arnd, 2020. "Performance of maturity transformation strategies," Discussion Papers 58/2020, Deutsche Bundesbank.
    11. Memmel, Christoph & Schertler, Andrea, 2011. "Banks' management of the net interest margin: Evidence from Germany," Discussion Paper Series 2: Banking and Financial Studies 2011,13, Deutsche Bundesbank.
    12. Pierluigi Bologna, 2017. "Banks’ maturity transformation: risk, reward, and policy," Temi di discussione (Economic working papers) 1159, Bank of Italy, Economic Research and International Relations Area.
    13. Pejman Abedifar & Philip Molyneux & Amine Tarazi, 2013. "Risk in Islamic Banking," Review of Finance, European Finance Association, vol. 17(6), pages 2035-2096.
    14. Molyneux, Philip & Reghezza, Alessio & Xie, Ru, 2019. "Bank margins and profits in a world of negative rates," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    15. Jugnu Ansari & Ashima Goyal, 2014. "Bank Competition, Managerial Efficiency and the Interest Rate Pass-Through in India," Contemporary Studies in Economic and Financial Analysis, in: Risk Management Post Financial Crisis: A Period of Monetary Easing, volume 96, pages 317-339, Emerald Group Publishing Limited.
    16. Memmel, Christoph & Heckmann-Draisbach, Lotta, 2023. "Banks' net interest margin and changes in the term structure," Discussion Papers 11/2023, Deutsche Bundesbank.
    17. Holton, Sarah & Kelly, Jane & Lydon, Reamonn & Monks, Allen & O'Donnell, Nuala, 2013. "The Impact of the Financial Crisis on Banks' Net Interest Margins," Economic Letters 01/EL/13, Central Bank of Ireland.
    18. Argimon, Isabel & Danton, Jayson M. & de Haan, Jakob & Rodriguez-Martin, Javier & Rodriguez-Moreno, Maria, 2023. "Low interest rates and banks’ interest margins: Does belonging to a banking group matter?," Journal of Banking & Finance, Elsevier, vol. 154(C).
    19. Raymond F. D. D. Chaudron & Leo Haan & Marco Hoeberichts, 2023. "Banks’ Net Interest Income from Maturity Transformation and Other Interest Income: Communicating Vessels?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(1), pages 35-62, February.
    20. Pejman Abedifar & Philip Molyneux & Amine Tarazi, 2014. "Non-Interest Income Activities and Bank Lending," Working Papers hal-00947074, HAL.

    More about this item

    Keywords

    Interest rate risk Term transformation Interest income;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:35:y:2011:i:2:p:282-289. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.