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Who bears interest rate risk?

Author

Listed:
  • Hoffmann, Peter
  • Langfield, Sam
  • Pierobon, Federico
  • Vuillemey, Guillaume

Abstract

We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. In contrast to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector. JEL Classification: G21, E43, E44

Suggested Citation

  • Hoffmann, Peter & Langfield, Sam & Pierobon, Federico & Vuillemey, Guillaume, 2018. "Who bears interest rate risk?," Working Paper Series 2176, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182176
    Note: 1137913
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2176.en.pdf
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    References listed on IDEAS

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    1. repec:oup:ecpoli:v:33:y:2018:i:96:p:531-586. is not listed on IDEAS
    2. repec:rba:rbaacv:acv2018-05 is not listed on IDEAS
    3. Carlo Altavilla & Miguel Boucinha & José-Luis Peydró & Thorsten BeckManaging Editor, 2018. "Monetary policy and bank profitability in a low interest rate environment," Economic Policy, CEPR;CES;MSH, vol. 33(96), pages 531-586.
    4. Rampini, Adriano A. & Viswanathan, S. & Vuillemey, Guillaume, 2019. "Risk Management in Financial Institutions," CEPR Discussion Papers 13787, C.E.P.R. Discussion Papers.
    5. Robin Dottling, 2018. "Bank Capital Regulation in a Zero Interest Environment," Tinbergen Institute Discussion Papers 18-016/IV, Tinbergen Institute, revised 19 Jan 2019.
    6. Pierluigi Bologna, 2017. "Banks’ maturity transformation: risk, reward, and policy," Temi di discussione (Economic working papers) 1159, Bank of Italy, Economic Research and International Relations Area.
    7. Carletti, Elena & De Marco, Filippo & Ioannidou, Vasso & Sette, Enrico, 2019. "Banks as Patient Lenders: Evidence from a Tax Reform," CEPR Discussion Papers 13722, C.E.P.R. Discussion Papers.
    8. Paludkiewicz, Karol, 2018. "Unconventional Monetary Policy, Bank Lending, and Security Holdings: The Yield-Induced Portfolio Rebalancing Channel," Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181669, Verein für Socialpolitik / German Economic Association.
    9. 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.

    More about this item

    Keywords

    Banking; Hedging; Interest Rate Risk; Risk Management;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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