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Why do banks bear interest rate risk?

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  • Memmel, Christoph

Abstract

This paper investigates determinants of banks' structural exposure to interest rate risk in their banking book. Using bank-level data for German banks, we find evidence that a bank's exposure to interest rate risk depends on its presumed optimization horizon. The longer the presumed optimization horizon is, the more the bank is exposed to interest rate risk in its banking book. Moreover, there is evidence that banks hedge their earnings risk resulting from falling interest levels with exposure to interest rate risk. The more a bank is exposed to the risk of a decline in the interest rate level, the higher its exposure to interest rate risk.

Suggested Citation

  • Memmel, Christoph, 2017. "Why do banks bear interest rate risk?," Discussion Papers 35/2017, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:352017
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    References listed on IDEAS

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    Cited by:

    1. Dräger, Vanessa & Heckmann-Draisbach, Lotta & Memmel, Christoph, 2020. "Interest and credit risk management in German banks: Evidence from a quantitative survey," Discussion Papers 02/2020, Deutsche Bundesbank.

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    More about this item

    Keywords

    interest rate risk; banks' business model; hedging;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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