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Derivatives, Portfolio Composition, and Bank Holding Company Interest Rate Risk Exposure

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  • Beverly Hirtle

Abstract

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, enduser 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. This paper was presented at the Financial Institutions Center's October 1996 conference on "

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Bibliographic Info

Article provided by Springer in its journal Journal of Financial Services Research.

Volume (Year): 12 (1997)
Issue (Month): 2 (October)
Pages: 243-266

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Handle: RePEc:kap:jfsres:v:12:y:1997:i:2:p:243-266

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Web page: http://www.springerlink.com/link.asp?id=102934

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  1. Allen N. Berger & Anil K. Kashyap & Joseph Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been," Center for Financial Institutions Working Papers 96-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Gary Gorton & Richard Rosen, . "Banks and Derivatives," Rodney L. White Center for Financial Research Working Papers 6-95, Wharton School Rodney L. White Center for Financial Research.
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  11. Jongmoo Jay Choi & Elyas Elyasiani, 1996. "Derivative Exposure and the Interest Rate and Exchange Rate Risks of U.S. Banks," Center for Financial Institutions Working Papers 96-53, Wharton School Center for Financial Institutions, University of Pennsylvania.
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Cited by:
  1. María Rodríguez-Moreno & Sergio Mayordomo & Juan Ignacio Peña, 2012. "Derivatives Holdings and Systemic Risk in the U.S. Banking Sector," Faculty Working Papers 21/12, School of Economics and Business Administration, University of Navarra.
  2. Au Yong, Hue Hwa & Faff, Robert & Chalmers, Keryn, 2009. "Derivative activities and Asia-Pacific banks' interest rate and exchange rate exposures," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 16-32, February.
  3. John Krainer & Jose A. Lopez, 2003. "How might financial market information be used for supervisory purposes?," Economic Review, Federal Reserve Bank of San Francisco, pages 29-45.
  4. Chaudhry, Mukesh K. & Christie-David, Rohan & Koch, Timothy W. & Reichert, Alan K., 2000. "The risk of foreign currency contingent claims at US commercial banks," Journal of Banking & Finance, Elsevier, vol. 24(9), pages 1399-1417, September.
  5. Ahmed, Anwer S. & Beatty, Anne & Bettinghaus, Bruce, 2004. "Evidence on the efficacy of interest-rate risk disclosures by commercial banks," The International Journal of Accounting, Elsevier, vol. 39(3), pages 223-251.
  6. 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).
  7. Lucia Esposito & Andrea Nobili & Tiziano Ropele, 2013. "The management of interest rate risk during the crisis: evidence from Italian banks," Temi di discussione (Economic working papers) 933, Bank of Italy, Economic Research and International Relations Area.
  8. Susan Ryan & Andrew C. Worthington, 2002. "Time-Varying Market, Interest Rate and Exchange Rate Risk in Australian Bank Portfolio Stock Returns: A Garch-M Approach," School of Economics and Finance Discussion Papers and Working Papers Series 112, School of Economics and Finance, Queensland University of Technology.
  9. Mohamed Rochdi Keffala & Christian de Peretti, 2013. "Effect of the Use of Derivative Instruments on Accounting Risk: Evidence from Banks in Emerging and Recently Developed Countries," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 169-178, May.
  10. Moya-Martínez, Pablo & Ferrer-Lapeña, Román & Escribano-Sotos, Francisco, 2014. "Oil price risk in the Spanish stock market: An industry perspective," Economic Modelling, Elsevier, vol. 37(C), pages 280-290.
  11. Papadamou, Stephanos & Siriopoulos, Costas, 2014. "Interest rate risk and the creation of the Monetary Policy Committee: Evidence from banks’ and life insurance companies’ stocks in the UK," Journal of Economics and Business, Elsevier, vol. 71(C), pages 45-67.
  12. Mun, Kyung-Chun & Emir Morgan, George, 2003. "Bank foreign exchange and interest rate risk management: simultaneous versus separate hedging strategies," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 277-297, July.
  13. Whidbee, David A. & Wohar, Mark, 1999. "Derivative activities and managerial incentives in the banking industry," Journal of Corporate Finance, Elsevier, vol. 5(3), pages 251-276, September.

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