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How Do Banks and Households Manage Interest Rate Risk? Evidence from the Swiss Mortgage Market

Author

Listed:
  • Christoph Basten
  • Benjamin Guin
  • Cathérine Tahmee Koch

Abstract

We exploit a unique data set that features both un-intermediated mortgage requests and independent offers from multiple banks for each request. We show that households typically are not prudent risk managers but prioritize the minimization of current mortgage payments over the risk of possible hikes in future mortgage payments. We also provide evidence that banks do influence the contracted mortgage rate fixation periods, trading off their own exposure to interest rate risk against the borrowers’ affordability and credit risk. Our results challenge the implicit assumption of the existing mortgage choice literature whereby fixation periods are determined entirely by households.

Suggested Citation

  • Christoph Basten & Benjamin Guin & Cathérine Tahmee Koch, 2017. "How Do Banks and Households Manage Interest Rate Risk? Evidence from the Swiss Mortgage Market," CESifo Working Paper Series 6649, CESifo.
  • Handle: RePEc:ces:ceswps:_6649
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp6649.pdf
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    References listed on IDEAS

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    4. Koijen, Ralph S.J. & Hemert, Otto Van & Nieuwerburgh, Stijn Van, 2009. "Mortgage timing," Journal of Financial Economics, Elsevier, vol. 93(2), pages 292-324, August.
    5. Christoph Basten & Catherine Koch, 2015. "Higher bank capital requirements and mortgage pricing: evidence from the Countercyclical Capital Buffer (CCB)," BIS Working Papers 511, Bank for International Settlements.
    6. Ulrike Malmendier & Stefan Nagel, 2016. "Learning from Inflation Experiences," The Quarterly Journal of Economics, Oxford University Press, vol. 131(1), pages 53-87.
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    8. Margarita Rubio, 2011. "Fixed‐ and Variable‐Rate Mortgages, Business Cycles, and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 657-688, June.
    9. repec:hrv:faseco:30758219 is not listed on IDEAS
    10. Andreas Fuster & James Vickery, 2015. "Securitization and the Fixed-Rate Mortgage," Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 176-211.
    11. Christoph Basten, 2020. "Higher Bank Capital Requirements and Mortgage Pricing: Evidence from the Counter-Cyclical Capital Buffer," Review of Finance, European Finance Association, vol. 24(2), pages 453-495.
    12. John Y. Campbell & João F. Cocco, 2015. "A Model of Mortgage Default," Journal of Finance, American Finance Association, vol. 70(4), pages 1495-1554, August.
    13. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 93-114, Fall.
    14. Ehrmann, Michael & Ziegelmeyer, Michael, 2014. "Household Risk Management and Actual Mortgage Choice in the Euro Area," MEA discussion paper series 201406, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    15. Raymond Chaudron, 2016. "Bank profitability and risk taking in a prolonged environment of low interest rates: a study of interest rate risk in the banking book of Dutch banks," DNB Working Papers 526, Netherlands Central Bank, Research Department.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Christoph Memmel, 2020. "What drives the short‐term fluctuations of banks' exposure to interest rate risk?," Review of Financial Economics, John Wiley & Sons, vol. 38(4), pages 674-686, October.
    2. Albertazzi, Ugo & Ongena, Steven & Fringuellotti, Fulvia, 2019. "Fixed rate versus adjustable rate mortgages: evidence from euro area banks," Working Paper Series 2322, European Central Bank.
    3. Jörg Clostermann & Franz Seitz, 2020. "Effektivverzinsung und Volatilität bei Finanzierung mit Zinsbindung und variablen Zinsen [Effective interest rates and volatility for fixed-rate and adjustable-rate mortages]," Zeitschrift für Immobilienökonomie (German Journal of Real Estate Research), Springer;Gesellschaft für Immobilienwirtschaftliche Forschung e. V., vol. 6(1), pages 29-46, April.
    4. Ugo Albertazzi & Fulvia Fringuellotti & Steven Ongena, 2018. "Fixed rate versus adjustable rate mortgages: evidence from euro area banks," Temi di discussione (Economic working papers) 1176, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Fixed-Rate Mortgage (FRM); Adjustable-Rate Mortgage (ARM); fixation period; maturity mismatch; interest rate risk; credit risk; duration;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • 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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