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Hedge Accounting and Banks' Interest Rate Risk Management

Author

Listed:
  • Ali, Waqar

    (HEC Paris - Accounting and Management Control Department)

  • Bhojraj, Sanjeev

    (Cornell University - Samuel Curtis Johnson Graduate School of Management)

  • Lu, Yao

    (Cornell University - Samuel Curtis Johnson Graduate School of Management)

  • Wang, Shuyan

    (University of Minnesota - Twin Cities, Carlson School of Management)

Abstract

We study how relaxing hedge accounting requirements under ASU 2017-12 affects banks' interest rate risk management. Banks significantly increase their use of hedge-accounted interest rate derivatives following the standard change. The standard change increases banks' holdings of longer-term loans, widening their asset-liability duration gap. Meanwhile, it leads to inflows of uninsured deposits and lower sensitivity of interest expense to changes in market rates, indicating a strengthened "deposit franchise." In exploring the motives behind banks' responses, we find that adopting ASU 2017-12 does not further reduce banks' already low interest rate risk exposure. Instead, it increases banks' interest income, while helping financially weaker banks better manage liquidity risk. Overall, our findings suggest that banks leverage ASU 2017-12 as an opportunity to undertake a broad, coordinated adjustment to their asset allocation and risk management strategies.

Suggested Citation

  • Ali, Waqar & Bhojraj, Sanjeev & Lu, Yao & Wang, Shuyan, 2026. "Hedge Accounting and Banks' Interest Rate Risk Management," HEC Research Papers Series 1657, HEC Paris.
    • Handle: RePEc:ebg:heccah:1657
    DOI: 10.2139/ssrn.7369340
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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