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What does the Federal Reserve's economic value model tell us about interest rate risk at U.S. community banks?

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Author Info
Gregory E. Sierra
Timothy J. Yeager
Abstract

The savings and loan crisis of the 1980s revealed the vulnerability of some depository institutions to changes in interest rates. Since that episode, U.S. bank supervisors have placed more emphasis on monitoring the interest rate risk of commercial banks. Economists at the Board of Governors of the Federal Reserve System developed a duration-based economic value model (EVM) designed to estimate the interest rate sensitivity of banks. The authors test whether measures derived from the Fed’s EVM are correlated with the interest rate sensitivity of U.S. community banks. The answer to this question is important because bank supervisors rely on EVM measures for monitoring and risk-scoping bank-level interest rate sensitivity. The authors find that the Federal Reserve’s EVM is indeed correlated with banks’ interest rate sensitivity and conclude that supervisors can rely on this tool to help assess a bank’s interest rate risk. These results are consistent with prior research that finds the average interest rate risk at banks to be modest, though the potential interaction between interest rate risk and other risk factors is not considered here.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2004)
Issue (Month): Nov ()
Pages: 45-60
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Handle: RePEc:fip:fedlrv:y:2004:i:nov:p:45-60:n:v.86no.6

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Keywords: Risk management ; Interest rates ; Banks and banking;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Aharony, Joseph & Saunders, Anthony & Swary, Ithzak, 1986. "The effects of a shift in monetary policy regime on the profitability and risk of commercial banks," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 363-377, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Thomas B. King & Daniel A. Nuxoll & Timothy J. Yeager, 2006. "Are the causes of bank distress changing? can researchers keep up?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 57-80. [Downloadable!]
  2. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2006. "Can feedback from the jumbo CD market improve bank surveillance?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 135-175. [Downloadable!]
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This page was last updated on 2009-12-15.

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