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How do banks and households manage interest rate risk? Evidence from mortgage applications and banks’ responses

Author

Listed:
  • Basten, Christoph

    (University of Zurich)

  • Guin, Benjamin

    (Bank of England)

  • Koch, Catherine

    (Bank for International Settlements)

Abstract

We exploit a unique dataset that features both un-intermediated mortgage requests and independent responses from multiple banks to each request. We show that households typically are not prudent risk managers, but prioritize minimizing current mortgage payments over insurance against future rate increases. Contrary to assumptions in the previous literature, we find that banks do also influence contracted rate fixation periods. They trade off their own exposure to interest rate risk against household requests and against credit risk.

Suggested Citation

  • Basten, Christoph & Guin, Benjamin & Koch, Catherine, 2018. "How do banks and households manage interest rate risk? Evidence from mortgage applications and banks’ responses," Bank of England working papers 733, Bank of England.
    • Handle: RePEc:boe:boeewp:0733
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/how-do-banks-and-households-manage-interest-rate-risk-evidence.pdf
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    Citations

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    Cited by:

    1. Sá, Ana Isabel, 2020. "To change or not to change: the impact of the law on mortgage origination," MPRA Paper 104818, University Library of Munich, Germany.
    2. Lukas, Moritz & Nöth, Markus, 2021. "Interest rate fixation periods and reference points," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 94(C).
    3. Agnese Carella & Valentina Michelangeli, 2021. "Information or persuasion in the mortgage market: the role of brand names," Temi di discussione (Economic working papers) 1340, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    Interest rate risk; credit risk; maturity mismatch; duration; fixation period; repricing frequency; fixed-rate mortgage; adjustable rate mortgage;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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