Banking on Deposits: Maturity Transformation Without Interest Rate Risk

Drechsler, Itamar; Savov, Alexi; Schnabl, Philipp

doi:10.2139/ssrn.2938236

Cited by 62 publications

(158 citation statements)

References 36 publications

(45 reference statements)

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“…These results are consistent with the previous three findings. Taken all pieces of evidence together, my results support a view that lies in between the classic textbook case and the one by Drechsler, Savov and Schnabl (2018). While banks engage in active risk management to reduce their interest rate risk exposure, such a risk transfer is not perfect.…”

Section: Introductionsupporting

confidence: 57%

“…That is, if deposits behave like long-term liabilities, it is in fact optimal to invest in long-term fixedrate assets. Taken together, Drechsler, Savov and Schnabl (2018) argue that banks do not take on interest rate risk, despite having a large maturity mismatch.…”

Section: Introductionmentioning

confidence: 95%

“…Given these features, the classic view that banks are strongly exposed to interest rate risk has been questioned recently, most prominently by Drechsler, Savov and Schnabl (2018) based on the following evidence. First, they show that net interest margins of U.S. banks have been insensitive to changes in the federal funds rate, the policy target rate of the Federal Reserve, or Fed for short, as illustrated in Figure A.1.…”

Section: Introductionmentioning

confidence: 99%

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Banks, Maturity Transformation, and Monetary Policy

Paul¹

2020

ERWP

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Banks engage in maturity transformation and the term premium compensates them for bearing the associated duration risk. Consistent with this view, I show that banks' net interest margins and term premia have comoved in the United States over the last decades. On monetary policy announcement days, banks' stock prices fall in response to an increase in expected future short-term interest rates but rise if term premia increase. These effects are reflected in the response of banks' net interest margins and amplified for institutions with a larger maturity mismatch. The results reveal that banks are not immune to interest rate risk.

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Section: Introductionsupporting

confidence: 57%

Section: Introductionmentioning

confidence: 95%

Section: Introductionmentioning

confidence: 99%

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Banks, Maturity Transformation, and Monetary Policy

Paul¹

2020

ERWP

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“…In specifications with and without institution fixed effects, we find a negative and statistically significant 20 From the perspective of the traditional view of banking as institutions with long-term assets and short-term liabilities, which suggests a sizeable maturity gap, the level of hedging may seem surprisingly low at first blush. However, recent evidence in Drechsler, Savov, and Schnabl (2018) suggests that the interest rate sensitivity of deposit rates is quite low in practice, suggesting that deposits are less short term than previously thought, and thus the maturity gap that financial institutions face may be considerably lower than the traditional view suggests. Therefore, the limited level of interest rate risk management may not be so puzzling after all.…”

Section: E Descriptive Statisticsmentioning

confidence: 87%

Retracted: Risk Management in Financial Institutions

Rampini¹,

Viswanathan²,

Vuillemey

2020

The Journal of Finance

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We study risk management in financial institutions using data on hedging of interest rate and foreign exchange risk. We find strong evidence that institutions with higher net worth hedge more, controlling for risk exposures, across institutions and within institutions over time. For identification, we exploit net worth shocks resulting from loan losses due to declines in house prices. Institutions that sustain such shocks reduce hedging significantly relative to otherwise‐similar institutions. The reduction in hedging is differentially larger among institutions with high real estate exposure. The evidence is consistent with the theory that financial constraints impede both financing and hedging.

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“…Using very meaningful data on the credit risk and interest rate risk exposures of German banks, we confirm their findings. Another reason for a bank being exposed to interest rate risk is put forward by Drechsler, Savov, and Schnabl (2018). They argue that the de facto duration of customer deposits is much larger than the de jure one and that the banks are, therefore, said to be exposed to interest rate risk if they invest in long-term loans that are financed with customer deposits.…”

Section: Literaturementioning

confidence: 99%

Interest and Credit Risk Management in German Banks: Evidence From a Quantitative Survey

2020

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Reproduction permitted only if source is stated. ISBN 978-3-95729-662-7 (Printversion) ISBN 978-3-95729-663-4 (Internetversion) Nichttechnische Zusammenfassung Fragestellung Aufgrund ihres Geschäftsmodells sind Banken dem Risiko ausgesetzt, dass sich das Zinsniveau abruptändert. In gewissem Umfang können Banken bestimmen, in welchem Ausmaß sie diesem Risiko ausgesetzt sind und inwieweit sie andere Risiken eingehen, besonders Kreditrisiken. In diesem Papier untersuchen wir die Folgen eines Anstiegs des Zinsniveaus auf die Banken sowie die Faktoren, von denen es abhängt, in welchem Ausmaß die Banken verschiedene Risiken eingehen. Beitrag Die deutsche Aufsicht führt alle zwei Jahre eine Umfrage unter den kleinen und mittelgroßen Banken in Deutschland durch. In dieser Umfrage rechnen diese Bankenüber einen fünfjährigen Horizont ihre zukünftige Gewinn-und Verlustrechnung für verschiedene Szenarien der Zinsentwicklung durch. Unter den Szenarien sind auch das Szenario einer zeitlich konstanten Zinsstruktur und das Szenario eines abrupten Zinsanstiegs. Wir nutzen diesen reichen Datensatz, um die oben angesprochenen Fragestellungen zu untersuchen. ErgebnisseIn unserer Untersuchung der Umfrage des Jahres 2017 zeigt sich Folgendes: Erstens ergibt sich im ersten Jahr nach der Erhöhung des Zinsniveau der größte Effekt auf den Jahresüberschuss aus den Abschreibungen im Anleiheportfolio, wobei die Banken diesen Effekt mildern, indem sie stille Reserven auflösen. Zweitens fällt das Nettozinseinkommen der Banken nach einem Zinsanstieg in den ersten Jahren und erhöht sich dann in den Folgejahren. Drittens gibt es einen positiven Zusammenhang zwischen der Nettozinsmarge einer Bank und derenÜbernahme von Zinsänderungs-und Kreditrisiken. Viertens scheinen Banken ihre Zinssätze für Kredite so setzen, dass sie für die erwarteten Verluste entschädigt werden und eine Prämie für das Kreditrisiko erhalten. Wir finden Hinweise darauf, dass Banken -fünftens -ihr Zinsänderungsrisiko einsetzen, um ihre Nettozinsmarge zeitlich zu glätten, und dass sie -sechstens -ein festes Risikobudget haben, das sie auf Zinsänderungs-und Kreditrisiken aufteilen. AbstractUsing unique data of a survey among small and medium-sized German banks, we analyze various aspects of risk management over a short-term and medium-term horizon. We especially analyze the effect of a 200-bp increase in the interest level. We find that, in the first year, the impairments of banks' bond portfolios are much larger than the reductions in their net interest income, that banks attenuate the resulting write-downs by liquidating hidden reserves and that banks which use interest derivatives have lower impairments in their bond portfolios. In addition, we find that banks' exposures to interest rate risk and to credit risk are remunerated, that banks' try to stabilize the mid-term net interest margin with exposure to interest rate risk and that they act as if they have a risk budget which they allocate either to interest rate risk or credit risk.

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Banking on Deposits: Maturity Transformation Without Interest Rate Risk

Cited by 62 publications

References 36 publications

Banks, Maturity Transformation, and Monetary Policy

Banks, Maturity Transformation, and Monetary Policy

Retracted: Risk Management in Financial Institutions

Interest and Credit Risk Management in German Banks: Evidence From a Quantitative Survey

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