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Prepayment Risk in Banking: Empirical Evidence from the Czech Republic

In: Regulation of Finance and Accounting

Author

Listed:
  • Petr Hanzlík

    (Charles University)

  • Petr Teplý

    (Prague University of Economics and Business)

Abstract

This paper deals with prepayment risks in banking and provides empirical evidence from the Czech banking sector. The prepayment risk of a loan can be viewed as an embedded option for a client to refinance his mortgage with a lower interest rate. Conversely, it holds that the clients’ profit means a loss to the bank as a mortgage provider. Our analysis quantifies the impact of early repayment of a mortgage on the balance sheets of three different types of banks, which differ in the structure of their financing. In particular, we examine the negative effects of prepaid mortgages on the interest margins of these banks. The results of models have shown that these prepayments risks not only were theoretical, but they were also reflected in the decreasing net interest margin of the Czech banking sector in the 2019–2020 period.

Suggested Citation

  • Petr Hanzlík & Petr Teplý, 2022. "Prepayment Risk in Banking: Empirical Evidence from the Czech Republic," Springer Proceedings in Business and Economics, in: David Procházka (ed.), Regulation of Finance and Accounting, chapter 0, pages 109-128, Springer.
    • Handle: RePEc:spr:prbchp:978-3-030-99873-8_9
    DOI: 10.1007/978-3-030-99873-8_9
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