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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

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Abstract

This paper investigates the size and development of Dutch banks' interest rate risk positions in the banking book during the period from 2008 to 2015. Interest rate risk positions are rather modest and the income from maturity transformation it generates is only a small proportion of the net interest margin and the return on assets. Interest rate risk positions do, however, vary significantly between banks and over time. In fact, banks adjust their interest rate risk in order to benefit from persistent excess long-term yields. Interest rate risk is negatively related to on-balance sheet leverage and has a U-shaped relation with solvability for banks that do not use derivatives. Banks that receive government assistance during the financial crisis have higher interest rate risk than banks that do not receive assistance.

Suggested Citation

  • 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.
  • Handle: RePEc:dnb:dnbwpp:526
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    Cited by:

    1. 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 Group Munich.
    2. Tijmen Daniëls & Patty Duijm & Franka Liedorp & Dimitris Mokas, 2017. "A top-down stress testing framework for the Dutch banking sector," DNB Occasional Studies 1503, Netherlands Central Bank, Research Department.
    3. repec:eee:finsta:v:30:y:2017:i:c:p:126-138 is not listed on IDEAS

    More about this item

    Keywords

    interest rate risk; banks; banking book; hedging; profitability;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • 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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