Interest Rate Uncertainty and the Financial Intermediary's Choice of Exposure

Deshmukh, S. D.; Greenbaum, Stuart I.; Kanatas, George

doi:10.1111/j.1540-6261.1983.tb03631.x

Cited by 44 publications

(16 citation statements)

References 8 publications

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“…Low interest rates, financial liberalization and increased competition from nonbank financial institutions have siphoned lending away from banks, toward alternative savings and investment products. Interest rate uncertainty may also encourage banks to reduce lending, and increase their involvement in providing fee-based services (Deshmukh et al, 1983;Smith, 1993;Heinecke and Shen, 1995). Brewer et al (1996) suggest that non-traditional instruments such as derivatives give financial institutions a chance to hedge their exposure to interest rate risk, complementing their lending activity.…”

Section: Disintermediationmentioning

confidence: 99%

Who Transfers Credit Risk? Determinants of the Use of Credit Derivatives by Large US Banks

Ashraf

Altunbaş

Goddard

2007

The European Journal of Finance

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Credit derivatives enable banks to transfer selected credit risks to third parties. An empirical model is developed for the motivation for bank participation in credit derivative markets and, conditional on participation, the factors that determine the volume of business transacted. Participation appears to be closely related to bank size, but there is only limited evidence that entry barriers related to franchise value or past experience in dealing in derivatives are important. There is evidence that banks use credit derivatives as part of their overall risk management strategy. However, the use of credit derivatives does not appear to be influenced by the extent of managerial share ownership.Banking, financial innovation, credit derivatives,

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Section: Disintermediationmentioning

confidence: 99%

Who Transfers Credit Risk? Determinants of the Use of Credit Derivatives by Large US Banks

Ashraf

Altunbaş

Goddard

2007

The European Journal of Finance

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“…Flannery and James (1984) provide evidence that the interest sensitivity of bank stock returns is related to the maturity composition of banks' assets and liabilities. Deshmukh, Greenbaum, and Kanatas (1983) discuss the impact of variable-rate liabilities and fixed-rate assets on interest rate risk and develop a model for balance sheet duration matching. Mitchell (1989) suggests that banks can manage interest rate risk by reducing the degree of maturity intermediation, essentially matching the interest rate sensitivity of their assets and liabilities.…”

Section: Introductionmentioning

confidence: 99%

Sources of Bank Interest Rate Risk

Fraser

Madura

Weigand

2002

The Financial Review

100

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We investigate bank stocks' sensitivity to changes in interest rates and the factors affecting this sensitivity. We focus on whether the exposure of commercial banks to interest rate risk is conditioned on certain balance sheet and income statement ratios. We find a significantly negative relation between bank stock returns and changes in interest rates over the period 1991-1996. We also find that bank characteristics measured from basic financial statement information explain bank stocks' sensitivity to interest rate changes. These results suggest that bank managers, analysts, and regulators can use this information to assess the relative risk exposure of banks.

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“…Niehans assumes the marginal "penalty" cost is equal to the cost of borrowing funds to meet the bank's expected liquidity deficit (e.g., the penalty cost could be viewed as the interest rate on funds borrowed in the federal funds market). Deshmukh, Greenbaum, and Kanatas (1983) extend Niehans' concept to examine when the FI will prefer to engage in asset transformation or brokerage activities. They find that increased riskiness in r l and r d will decrease the FI's desire to engage in asset transformation and increase its propensity to act as a broker (even though banks are assumed to be risk-neutral expected profit maximizers).…”

Section: A) Fixed Coefficients Modelmentioning

confidence: 99%

How Theories of Financial Intermediation and Corporate Risk‐Management Influence Bank Risk‐Taking Behavior

Pagano

2001

Financial Market

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This paper examines the rationales for risk-taking and risk-management behavior from both a corporate finance and a banking perspective. After combining the theoretical insights from the corporate finance and banking literatures related to hedging and risk-taking, the paper reviews empirical tests based on these theories to determine which of these theories are best supported by the data. Managerial incentives are the most consistently supported rationale for describing how banks manage risk. In particular, moderate/high levels of equity ownership reduce bank risk while positive amounts of stock option grants increase bank risk-taking behavior. The review of empirical tests in the banking literature also suggests that financial intermediaries coordinate different aspects of risk (e.g., credit and interest rate risk) in order to maintain a certain level of total risk. The empirical results indicate hedgeable risks such as interest rate risk represent only one dimension of the risk-management problem. This implies empirical tests of the theories of corporate risk-management need to consider individual sub-components of total risk and the bank's ability to trade these risks in a competitive financial market. This finding is consistent with the reality that banks have non-zero expected financial distress costs and bank managers cannot fully diversify their bank-related personal investments.

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Interest Rate Uncertainty and the Financial Intermediary's Choice of Exposure

Cited by 44 publications

References 8 publications

Who Transfers Credit Risk? Determinants of the Use of Credit Derivatives by Large US Banks

Who Transfers Credit Risk? Determinants of the Use of Credit Derivatives by Large US Banks

Sources of Bank Interest Rate Risk

How Theories of Financial Intermediation and Corporate Risk‐Management Influence Bank Risk‐Taking Behavior

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