The management of interest rate risk during the crisis: evidence from Italian banks
Changes in interest rates constitute a major source of risk for banksï¿½ business activity and can diversely affect their financial conditions and performance. We use a unique dataset to analyse Italian banksï¿½ exposure to interest rate risk during the crisis, relying on the standardized duration gap approach proposed by the Basel Committee. We provide evidence that banks managed their overall interest rate risk exposure by means of on-balance-sheet restructuring complemented by hedging with financial derivatives. But the complementary relationship between risk-management decisions differs significantly across banks. The different impact of a future increase in interest rates on banksï¿½ economic value will be a matter of concern for policymakers when they return to a less accommodative monetary policy stance.
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