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Interest rate derivatives and asset-liability management by commercial banks

Author

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  • Katerina Simons

Abstract

Bank participation in derivative markets has risen sharply in recent years. The total amount of interest rate, currency, commodity, and equity contracts at U.S. commercial and savings banks soared from $6.8 trillion in 1990 to $11.9 trillion in 1993, an increase of 75 percent. A major concern facing policymakers and bank regulators today is the possibility that the rising use of derivatives has increased the riskiness of individual banks and of the banking system as a whole.> This study uses quarterly Call Report data to shed some light on the pattern of derivative use by U.S. commercial banks. It finds that among banks with assets of less than $5 billion, larger banks tend to use interest rate swaps more intensively, while no clear relationship was found between size of bank and other interest rate derivatives. In addition, the study found that for banks with more than $5 billion in assets, those with weaker asset quality tend to be more intensive users of derivatives than banks with better asset quality. However, the author points out that these results, while intriguing, do not give a clear indication of how derivatives are used to manage interest rate risk, or whether they are used to increase or reduce that risk.

Suggested Citation

  • Katerina Simons, 1995. "Interest rate derivatives and asset-liability management by commercial banks," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 17-28.
  • Handle: RePEc:fip:fedbne:y:1995:i:jan:p:17-28
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    File URL: http://www.bostonfed.org/economic/neer/neer1995/neer195b.htm
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    File URL: http://www.bostonfed.org/economic/neer/neer1995/neer195b.pdf
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    References listed on IDEAS

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    1. Kim B. Clark & Lawrence H. Summers, 1979. "Labor Market Dynamics and Unemployemnt: A Reconsideration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(1), pages 13-72.
    2. Blanchard, Olivier J, 1984. "The Lucas Critique and the Volcker Deflation," American Economic Review, American Economic Association, vol. 74(2), pages 211-215, May.
    3. George L. Perry, 1970. "Changing Labor Markets and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(3), pages 411-448.
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    Citations

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    Cited by:

    1. Ioannidou, Vasso P., 2005. "Does monetary policy affect the central bank's role in bank supervision?," Journal of Financial Intermediation, Elsevier, vol. 14(1), pages 58-85, January.
    2. Beverly Hirtle, 1997. "Derivatives, Portfolio Composition, and Bank Holding Company Interest Rate Risk Exposure," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 243-266, October.
    3. Joe Peek & Eric Rosengren, 1997. "Derivatives Activity at Troubled Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 287-302, October.
    4. 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.
    5. John S. Jordan, 1998. "Resolving a banking crisis: what worked in New England," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 49-62.

    More about this item

    Keywords

    Derivative securities ; Risk;

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