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Which interest rate scenario is the worst one for a bank? Evidence from a tracking bank approach for German savings and cooperative banks

  • Christoph Memmel

Interest income is the most important source of revenue for most banks. The aim of this paper is to assess the impact of different interest rate scenarios on the banks' interest income. As we do not know the interest rate sensitivity of real banks, we construct for each bank a portfolio with a similar composition of its assets and liabilities, called 'tracking bank'. We evaluate the effect of 260 historical interest rate shocks on the tracking banks of German savings and cooperative banks. It turns out that a sharp decrease in the steepness of the yield curve has the most negative impact on the banks' interest income.

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Article provided by Inderscience Enterprises Ltd in its journal Int. J. of Banking, Accounting and Finance.

Volume (Year): 1 (2008)
Issue (Month): 1 ()
Pages: 85-104

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Handle: RePEc:ids:injbaf:v:1:y:2008:i:1:p:85-104
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  1. Diebold, Francis X. & Li, Canlin, 2003. "Forecasting the term structure of government bond yields," CFS Working Paper Series 2004/09, Center for Financial Studies (CFS).
  2. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
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  4. Sharpe, William F., 1967. "Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(02), pages 76-84, June.
  5. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
  6. James M. O'Brien, 2000. "Estimating the value and interest rate risk of interest-bearing transactions deposits," Finance and Economics Discussion Series 2000-53, Board of Governors of the Federal Reserve System (U.S.).
  7. Jan Willem van den End & Marco Hoeberichts & Mostafa Tabbae, 2006. "Modelling Scenario Analysis and Macro Stress-testing," DNB Working Papers 119, Netherlands Central Bank, Research Department.
  8. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  9. 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, Research Centre.
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