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Interest Rate Risk

In: Banking and Financial Markets

Author

Listed:
  • Andrada Bilan

    (University of Zurich)

  • Hans Degryse

    (Katholieke University of Leuven)

  • Kuchulain O’Flynn

    (University of Zurich)

  • Steven Ongena

    (University of Zurich)

Abstract

We study how modern finance has affected banks interest rate risk management and how the decision hedge interest rate risk affects the transmission of monetary policy, the value of its equity, its lending behaviour, and, hence, the investment decisions of the firms to which they lend. Financial intermediation often exposes banks to interest rate risks by creating mismatches in the maturity structure and repricing terms of their assets and liabilities. Unlike credit risk which a bank can be more or less exposed to but requires credit derivatives to completely remove, it is possible for a bank to completely insulate itself from interest rate risk without trading derivatives. While banks may use interest rate derivatives to manage their interest rate risk exposure, they may also use on-balance sheet techniques, that is, managing the difference in maturity and repricing terms of their assets and liabilities. Before reviewing the literature that focuses on the effects of this decision, we begin with a discussion of the papers that seek to uncover the methods and motives for managing interest rate risk.

Suggested Citation

  • Andrada Bilan & Hans Degryse & Kuchulain O’Flynn & Steven Ongena, 2019. "Interest Rate Risk," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Banking and Financial Markets, chapter 0, pages 31-60, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-3-030-26844-2_3
    DOI: 10.1007/978-3-030-26844-2_3
    as

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