Banks' interest rate risk: the net interest income perspective versus the market value perspective

We use portfolios of passive investment strategies to replicate the interest risk of banks' banking books. The following empirical statements are derived. (i) Changes in banks' market value and in their net interest income are highly correlated, irrespective of the banks' portfolio composition. (ii) However, banks' portfolio composition has a huge impact on the ratio of changes in net interest income relative to changes in market value. These results are important for the design and interpretation of interest rate stress tests for banks.     

The Banking View of Bond Risk Premia

Banks' balance sheet exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with optimal risk management, a banking counterpart to the household Euler equation. In equilibrium, the bond risk premium compensates banks for bearing fluctuations in interest rates. When banks' exposure to interest rate risk increases, the price of this risk simultaneously rises. We present a collection of empirical observations that support this view, but also discuss several challenges to this interpretation.     

Are central banks' projections meaningful?

Central banks' projections – i.e. forecasts conditional on a given interest rate path – are often criticized on the grounds that their assumptions are inconsistent with the existence of a unique equilibrium in many forward-looking models. The present paper describes three alternative approaches to constructing projections that are not subject to the above criticism, using the New Keynesian model as a reference framework. The three approaches are shown to generate different projections for inflation and output, even though they imply an identical path for the interest rate. The latter result calls into question the meaning and usefulness of such projections.     

Monetary Policy and the Asset Risk‐Taking Channel

How important is the risk‐taking channel for monetary policy? To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem that distorts banks' incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show theoretically that this novel transmission channel generates a new monetary policy trade‐off between inflation and real interest rate stabilization, whereby the central bank may prefer to tolerate greater inflation volatility in order to lower excessive risk taking.     

The interest rate pass-through in the euro area during the sovereign debt crisis

We investigate the pass-through of monetary policy to bank lending rates in the euro area during the sovereign debt crisis, in comparison to the pre-crisis period. We make the following contributions. First, we use a factor-augmented vector autoregression, which allows us to assess the responses of a large number of country-specific interest rates and spreads. Second, we analyze the effects of monetary policy on the components of the interest rate pass-through, which reflect banks' funding risk (including sovereign risk) and markups charged by banks over funding costs. Third, we not only consider conventional but also unconventional monetary policy. We find that while the transmission of conventional monetary policy to bank lending rates has not changed with the crisis, the composition of the pass-through has changed. Specifically, expansionary conventional monetary policy lowered sovereign risk in peripheral countries and longer-term bank funding risk in peripheral and core countries during the crisis, but has been unable to lower banks' markups. This was not, or not as much, the case prior to the crisis. Unconventional monetary policy helped decreasing lending rates, mainly due to large shocks rather than a strong propagation.     

Deviations from Covered Interest Rate Parity

We find that deviations from the covered interest rate parity (CIP) condition imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on asset prices. The CIP deviations also appear significantly correlated with other fixed income spreads and with nominal interest rates.     

The role of the reference rate in an interbank market with imperfect information

This study investigates the potential role of the reference rate in an interbank market where individual banks cannot fully identify the nature of underlying shocks affecting their interbank transactions. We find that the reference rate does not always mitigate the market distortion arising from imperfect information. When the number of sample transactions is smaller than a certain threshold, the reference rate magnifies the distortion even if the reference rate is not affected by any reporting noise. The threshold depends on the relative size of aggregate and idiosyncratic shocks. Noise in the reported interest rates, which is potentially increased by banks' manipulations, distorts individual banks' inferences about the underlying shocks, and thereby raises the threshold. When noise is highly correlated among multiple sample transactions, perhaps owing to collusive manipulations, it is possible that increasing the number of sample transactions may never mitigate the market distortion.     

Option compensation,risky mortgage lending,and the financial crisis

We examine how option compensation affects banks' risky mortgage origination and sale decisions before the financial crisis in 2008. We find that, in the period immediately before the financial crisis, option compensation has little impact on the riskiness of mortgages originated and is negatively associated with mortgage lenders' propensity to sell risky mortgages. The results are consistent with banks' incentives to maximize revenues from origination and servicing fees while managing risk exposure by adjusting the sale of risky mortgages. For identification, we use bank-year fixed effects and matched loan applications to control for both supply- and demand-side factors of mortgage lending. We find similar results when using the variation in option compensation generated by the implementation of FAS 123R.     

贷款利率市场化前后商业银行股票网络拓扑性质分析

运用复杂网络方法,构建商业银行股票收益率网络,考量贷款利率市场化前后商业银行股票网络的拓扑性质变化.结果表明:贷款利率市场化前后,16家商业银行股票收益率相关系数没有发生显著变化,网络的平均路径长度及聚集系数也未发生明显变化,但贷款利率市场化后国有五大行股票收益距离更近,彼此相关性更强,网络中心节点变化较大.     

Deregulation, Deposit Markets, and Banks' Costs of Funds

Deposit interest rate deregulation and financial service innovation have led to dramatic changes in large banks' deposit composition. This paper presentes a statistical cost analysis of changes in unit costs faced by banks under comprehensive financial deregulation. The results of this paper show that the unit cost of retail deposits-demand and passbook savings deposits-has increased relative to wholesale deposits-federal funds, certificates of deposit, and money market time deposits. We show, contrary to conventional wisdom, that changes in unit costs have been caused by processing costs rather than by interest expenses.     

The Determinants of Net Interest Margins of Commercial Banks in Mainland China

This paper studies empirically the determinants of Chinese commercial banks' net interest margins from 1996 to 2003. It applies an extension to the Ho and Saunders (1981) model to identify the elements affecting net interest margins. The results indicate that the determinants of net interest margins in the Chinese market include market competition structure, average operating costs, degree of risk aversion, transaction size, implicit interest payments, opportunity cost of reserve, and management efficiency.     

International Propagation of the Credit Crisis: Lessons for Bank Regulation*

The authors use a large sample of non‐U.S. banks to examine the origins and spread of the 2007–2009 crisis. Using both stock market and structural variables, they test whether the effects of the crisis on individual banks are better explained by crisis models or by the VaR‐type analysis of the Basel system. The latter emphasizes risk weightings for individual assets while ignoring linkages that could leave banks exposed to systemic shocks. Consistent with crisis models, the authors find that a small set of pre‐crisis measures of a bank's international linkages, leverage, and the fragility of its liability structure does a good job of discriminating between banks that suffered a large impact and those that did not. (Indeed, these measures explain almost 50% of the differences among banks' stock returns during the crisis period, and almost 40% of the changes in the variability of those returns.) The authors also provide evidence of both a direct linkage among banks' stock returns and an indirect linkage that could reflect either linkages in the real economy or common demands by investors for liquidity. The authors run a “horse race” that demonstrates that simple measures of book leverage were better predictors of bank performance than the Basel capital ratios. They find that banks with lower Basel risk weightings prior to the crisis proved, on average, to be more exposed to the crisis. The authors' explanation is that banks with lower Basel risk measures tended to operate with higher leverage and more aggressive funding strategies, which in turn exposed them to greater crisis risk (even as they conformed to the letter of the Basel system in terms of asset risk measures). Finally, the authors find no evidence that substandard governance was a separate contributing factor to crisis exposure. Banks with substantial international business that were exposed to systemic shocks had high governance scores.     

Banks and Corporate Decisions: Evidence from Business Groups

Banks who can influence clients' governance may steer those clients into mergers to reduce the banks' own risk. Empirical evidence based on Japan's mergers and acquisitions (M&As) during the country's 1990s banking crisis indicates that acquirers with stronger bank ties made acquisitions that they would not have normally made. These acquirers lost more shareholder value via mergers than acquirers with weaker bank ties. The banks' risk was reduced, while the banks' shareholders gained significant excess returns from their borrowers' mergers. This paper offers implications for corporate governance of firms with strong bank ties and advances the existing knowledge on business groups.     

Do bank managers signal through cash flow statements?

We empirically examine the cash flow statements for Japanese banks and whether their managers engage in classification shifting to temper concerns about risk exposure. To create a buffer against liquidity shocks, they shift cash flows from investing and/or financing activities to operating activities. We also find robust evidence that classification shifting intensifies in higher risk situations. Although prior research on managerial discretion focuses on earning management, we are the first to show cash flow management to avoid sequential negative changes in operating cash flows. We show that these activities convey valuable information about changes in banks' risk exposure.     

Value-at-risk vs. building block regulation in banking

Existing regulatory capital requirements are often criticized for only being loosely linked to the economic risk of the banks' assets. In view of the attempts of international regulators to introduce more risk sensitive capital requirements, we theoretically examine the effect of specific regulatory capital requirements on the risk-taking behavior of banks. More precisely, we develop a continuous time framework where the banks' choice of asset risk is endogenously determined. We compare regulation based on the Basel I building block approach to value-at-risk or ‘internal model’-based capital requirements with respect to risk taking behavior, deposit insurance liability, and shareholder value. The main findings are: (i) value-at-risk-based capital regulation creates a stronger incentive to reduce asset risk when banks are solvent, (ii) solvent banks that reduce their asset risk reduce the current value of the deposit insurance liability significantly, (iii) under value-at-risk regulation the risk reduction behavior of banks is less sensitive to changes in their investment opportunity set, and (iv) banks' equityholders can benefit from risk-based capital requirements.     

Information reusability,competition and bank asset quality

This paper explains the recent decline m bank asset quality using the notion of information reusability. Banks are viewed as information processors; they exist because of their advantage in extracting the surplus associated with the reusability of borrower-specific information. It is shown that a bank's incentive to screen loan applicants, and hence maintain the quality of its assets, depends on the surplus this screening can produce, which in turn depends on information reusability. Two recent changes in banks' operating environment are increased competitition and greater temporal volatility in borrower credit risks. The former has directly reduced banks' informational surplus while the latter has impaired information reusability. Hence screening expenditures have been reduced and the diminution of screening has lowered the quality of bank assets. It is also shown that an increase in deposit insurance premia has an effect similar to that of narrowing interest spreads and therefore will result in reduced asset screening and impaired asset quality.     

Ambiguity and risk factors in bank stocks

The determinants of banks' cost of equity are not well understood. We depart from prior work assuming rational expectations and instead explore the impact of Knightian uncertainty or ambiguity on bank stocks. We test a large set of asset pricing models and find that investors' lack of confidence in both the drift and correlation structure driving bank stock returns affects banks' cost of capital. We also investigate the economic relation among ambiguity, market liquidity, and banks' capital shortfall, which reveals the transmission channels through which ambiguity may increase the probability of a systemic crisis. Our findings have implications for macroprudential policy.     

How Banks' Value-at-Risk Disclosures Predict their Total and Priced Risk: Effects of Bank Technical Sophistication and Learning over Time

Using a sample of eight large commercial banks from 1994 to 2000, Jorion (2002) finds that banks' VaR disclosures for their trading portfolios predict trading income variability. We extend Jorion's findings using a larger sample of 17 banks from 1997 to 2002 reporting trading VaRs under FRR No. 48 (1997). We find that banks' trading VaRs have predictive power for trading income variability that increases with bank technical sophistication and over time. We find that banks' trading VaRs have predictive power for a bank-wide measure of total risk, return variability, and for two bank-wide measures of priced risk, beta and realized returns.     

Risk and Market Segmentation in Financial Intermediaries' Returns

This study examines both the quantity and price of risk exposure for different segments of financial intermediaries. Overall, we find evidence of market segmentation in the U.S. financial services industry. Specifically, we find that securities firms, consistently over the sampling period 1974–1994, had the most market risk exposure with the lowest market risk premium. Banks' market risk fluctuated over the sampling period. Banks increased their market risk-taking after the shift in monetary target in October 1979 and the announcement of the risk-based capital requirements in July 1988. The banks' market risk became the highest and insignificantly different from securities firms'. The results are consistent with the moral hazard argument; that is, banks took on more risk to take advantage of government guarantees as their charter value declined. Banks were subject to relatively high interest rate risk premium. However, in response to increased interest rate volatility and decreased charter value after October 1979, banks (while they increased their market risk exposure) lowered their interest rate risk exposure to an insignificant level. The results suggest that the federal safety net may have been perceived by the market as covering only market risk but not interest rate risk. Overall, we find little evidence of interest rate risk exposure, suggesting the prevalence of hedging programs using interest rate derivatives. The interest rate risk premiums, unlike the risk exposure, differ across financial intermediaries.     

利率市场化与银行资产配置选择 —基于45家商业银行的面板数据分析

本文在对商业银行资产配置进行理论分析的基础上,构建利率市场化对商业银行 资产配置影响的实证模型,利用45家商业银行2003-2014年的面板数据进行实证检验,实证结 果表明：利率市场化对信贷资产的增长没有产生激励效应,商业银行并未在利率市场化进程中 加速信贷扩张;利率市场化对商业银行资产配置结构产生了显著影响,随着利率市场化程度的 加深,信贷资产和证券资产在总资产中的占比都增大;利率市场化对信贷资产内部配置结构也 产生了显著影响,促进零售信贷资产占比提升,而对公司信贷资产占比和前十大客户信贷资产 占比的影响为负,这验证了在利率市场化的推进过程中,商业银行将信贷资源向个人客户和中 小企业客户倾斜,利率市场化发挥了一定的积极效应。