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

Drager, Vanessa; Heckmann-Draisbach, Lotta; Memmel, Christoph

doi:10.2139/ssrn.3540397

Cited by 4 publications

(11 citation statements)

References 16 publications

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“…To account for the important role of deposits, we look at a bank's long-run pass-through, which reflects the business model and, indirectly, the extent of their deposit funding: A bank that relies on customer deposits for funding and grants loans is likely to have a large mismatch in its long-run pass-through: On the asset side, changes in the interest rate level will sooner or later lead to corresponding changes in the loan rates, whereas deposit rates do not change as much, even in the long run. As in Dräger et al (2021), we find that changes in the interest rate level have a strong impact on banks with a large pass-through mismatch and that the exposure to interest rate risk softens the effect. Both effects are substantially more pronounced if there is an increase in the interest rate level than if there is a decrease.…”

Section: Introductionsupporting

confidence: 65%

German banks’ behavior in the low interest rate environment

Busch

Littke

Memmel

et al. 2021

Financ Mark Portf Manag

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Using data from a quantitative survey of German banks at three points in time (2015, 2017 and 2019), we analyze the impact of changes in the interest rate level on banks’ net interest income and the countermeasures they take. A decline in the interest rate level has a more negative impact on net interest income, the longer the decline lasts and the lower the interest rate level is. This impact softens with increasing risk of changes in the present value of banking books. We do not find that banks generally increase their risks following a drop in income. However, poorly capitalized banks subsequently increase the credit risk of their bond portfolio. After a fall in operational income, banks increase their fee and commission income and reduce their costs. In addition, banks tend to extend their mortgage lending after a drop in their interest income.

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Section: Introductionsupporting

confidence: 65%

German banks’ behavior in the low interest rate environment

Busch

Littke

Memmel

et al. 2021

Financ Mark Portf Manag

Self Cite

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“…To account for the important role of deposits, we look at a bank's long-run pass-through, which reects the business model and, indirectly, the extent of their deposit funding: A bank that relies on customer deposits for funding and grants loans is likely to have a large mismatch in its long-run pass-through: On the asset side, changes in the interest rate level will sooner or later lead to corresponding changes in the loan rates, whereas deposit rates do not change as much, even in the long run. As in Dräger, Heckmann-Draisbach, and Memmel (2021), we nd that changes in the interest rate level have a strong impact on banks with a large pass-through mismatch and that the exposure to interest rate risk softens the eect. Both eects are substantially more pronounced if there is an increase in the interest rate level than if there is a decrease.…”

supporting

confidence: 60%

“…where Risk T,i is either the change (relative to the previous survey) in mark-tomarket losses of bonds in the liquidity reserve (Liquititätsreserve) as a consequence of an increase in the risk interest rate level ( BV L) or the change in the rating of these bonds ( BR) or the change in the bank's exposure to interest rate risk ( IRR). Note that the risk measures BV L and BR only encompass the banks' bond holdings, which account for about 20% of total assets (see Dräger et al (2021)). Only the measure IRR considers the whole banking book (including positions on the liability-side such as deposits, but leaving aside the trading book, if it exists).…”

Section: Bank-specic Determinantsmentioning

confidence: 99%

“…The 2015 and 2017 waves of the survey have already been analyzed in Busch, Drescher, and Memmel (2017) and in Dräger et al (2021), but with a dierent focus. analyze the assumption of a static balance sheet.…”

mentioning

confidence: 99%

“…Dräger et al (2021) investigate how banks deal with the risks associated with credit and interest business. In contrast toDräger et al (2021), we not only analyze the upward scenario of the 2017 wave of the survey, but also the waves of 2015 and 2019, i.e. for each bank we have a time-series from 2014 to 2023 (see Table1).…”

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confidence: 99%

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German Banks' Behavior in the Low Interest Rate Environment

et al. 2021

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Research QuestionIt is empirically well documented that the higher the interest rate level is, the more banks earn in their interest business. Using data from a quantitative survey among banks in Germany, we investigate the relationship between banks' net interest income and the interest rate level, the inuence of bank-specic factors, as well as measures used by banks to counteract income losses due to the low interest rate environment. As measures, we examine heightened risk-taking, increase of fee and commission income, cost-cutting and expansion of credit volume. ContributionEvery other year, the German banking supervisory authorities conduct a quantitative survey among small and medium-sized banks in Germany. In this survey, banks have to forecast their nancial statements over a ve-year horizon for various hypothetical interest rate scenarios. We use the data from the last three surveys (2015, 2017, 2019), to answer the above questions. The data allow us to investigate the eect of a change in the interest rate level in isolation, i.e. without interference from other developments. ResultsWe nd that a negative interest rate shock leads to lower net interest income, with the loss of income being greater the more time has passed since the interest rate shock and the lower the original interest rate level was. Banks with large mismatches between the pass-through on their asset and liability side are particularly aected, with a high interest rate risk from a present-value perspective having a mitigating eect. We do not nd that banks with income losses generally increase their risk-taking. But we do nd evidence that weakly capitalized banks increase the credit risk of their bond portfolio. Furthermore, banks that suer income losses increase their fee and commission income, cut costs and expand their mortgage lending. Nichttechnische Zusammenfassung Fragestellung Es ist empirisch gut dokumentiert, dass Banken umso mehr im Zinsgeschäft verdienen, je höher das Zinsniveau ist. Anhand von Daten einer quantitativen Umfrage unter Banken in Deutschland untersuchen wir den Zusammenhang zwischen Zinseinkommen der Banken und dem Zinsniveau, den Einuss bankindividueller Faktoren sowie Maÿnahmen, mit denen sich Banken gegen Einkommenseinbuÿen aufgrund des Niedrigzinsumfelds stemmen. Als Maÿnahmen untersuchen wir die Risikoerhöhung, die Ausweitung des Provisionseinkommens, Kostensenkungen und die Ausweitung des Kreditvolumens. Beitrag Die deutsche Bankenaufsicht führt alle zwei Jahre eine quantitative Umfrage unter den kleinen und mittelgroÿen Banken in Deutschland durch. In dieser Umfrage müssen die Banken ihre Gewinn-und Verlustrechnung über einen Horizont von fünf Jahren für verschiedene hypothetische Zinsszenarien prognostizieren. Wir nutzen die Daten der letzten drei Umfragen (2015, 2017, 2019), um die oben genannten Fragestellungen zu beantworten. Die Daten ermöglichen es, die Wirkung einer Änderung des Zinsniveaus isoliert zu betrachten, d.h. ohne Störungen durch andere Entwicklungen. Ergebnisse Wir nden, dass ein negative...

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Managing Credit Risk Strategies for Commercial Banks: The Case of Kosovo

Sahiti

Alshiqi

Нескородєва

et al. 2022

JEECAR

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The study aims to substantiate effective strategies to manage credit risks in commercial banks, for example, Kosovo. Based on the annual financial statements of commercial banks in Kosovo for 2010-2020. We built polynomial regression models to assess the impact of credit risk on the bank's financial stability. Empirically, determined and argued the different nature of the credit risks influencing the bank's financial stability according to various on the assets size of commercial banks. Preventive and reactive scenarios for minimizing the negative impact of credit risk on the financial stability of commercial banks in Kosovo have been determined using the constructed regression models. The results obtained are of practical importance and can help develop effective strategies for managing the financial risks in commercial banks in times of crisis and building up financial stability in stable conditions.

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

Cited by 4 publications

References 16 publications

German banks’ behavior in the low interest rate environment

German banks’ behavior in the low interest rate environment

German Banks' Behavior in the Low Interest Rate Environment

Managing Credit Risk Strategies for Commercial Banks: The Case of Kosovo

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