The management of interest rate risk during the crisis: Evidence from Italian banks |
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| Affiliation: | 1. Booth School of Business, University of Chicago, 5807 S. Woodlawn Avenue, Chicago, IL 60637, USA;2. National Bureau of Economic Research, USA;3. Centre for Economic Policy Research, UK;4. Department of Finance, Université du Luxembourg, 6, rue Richard Coudenhove-Kalergi, L-1359, Luxembourg;5. Banque de France, 31 rue Croix des Petits Champs, Paris 75001, France;6. Department of Economics, Princeton University, Julis Romo Rabinowitz Building, Princeton, NJ 08544, USA;1. European Central Bank, Sonnemannstrasse 20, Frankfurt, 60314, Germany;2. Norwegian Business School, CAMP, and CEPR. Department of Economics, BI Norwegian Business School, Nydalsveien 37, Oslo, 0484, Norway |
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| Abstract: | We use a unique dataset to analyze how Italian banking groups managed their exposure to interest rate risk during the recent financial crisis. First of all, we document that on average the interest rate risk exposure – measured by duration gap approach – has been limited and well below the alert level enforced by regulators. Second, our econometric results indicate a relation of substitutability between banks’ on-balance-sheet interest rate risk and their use of interest rate derivatives suggesting that banks used these two instruments to curb their overall interest rate risk exposure in case of an increase in interest rates. Furthermore, we also find robust evidence of a negative correlation between banks’ interest rate risk and liquidity risk. |
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| Keywords: | Interest rate risk Banks Financial crisis |
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