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Quantifying interest rate risk and the effect of model assumptions behind sight deposits

Author

Listed:
  • Stefan Kerbl

    (Oesterreichische Nationalbank, On-Site Banking Inspections Division – Large Banks)

  • Boris Simunovic
  • Andreas Wolf

Abstract

Have Austrian banks taken on higher interest rate risks amid the low interest rate environment? According to the interest rate risk statistics, which quantify the effect of the regulatory 200-basis-point interest rate shock, interest rate risk as reported by banks has not risen significantly since the beginning of the low interest rate period. However, in measuring interest rate risk, banks need to rely on model assumptions, especially with regard to the repricing dates they assume for customer deposits. Harnessing this room for maneuver, banks may compensate for longer fixation periods on the assets side (maturity transformation). In turn, a higher degree of maturity transformation and interest rate sensitivity might not be fully reflected in the reported interest rate risk. Analyzing this room for maneuver, we calculate Austrian banks’ interest rate risk level over time while assuming standardized and conservative repricing dates. Under these conservative repricing dates, a different picture on interest rate risks emerges especially for large banks. We conclude that large banks in Austria have seen a marked increase in maturity transformation over time, which was mirrored by small and medium-sized banks to a lesser extent. It follows that interest rate risk in the banking book, and its quantification, is now more relevant for evaluating banks’ business models and capital adequacy than was the case before the start of the low interest rate phase.

Suggested Citation

  • Stefan Kerbl & Boris Simunovic & Andreas Wolf, 2019. "Quantifying interest rate risk and the effect of model assumptions behind sight deposits," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 37, pages 73-85.
  • Handle: RePEc:onb:oenbfs:y:2019:i:37:b:2
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    References listed on IDEAS

    as
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    6. Gauti B. Eggertsson & Ragnar E. Juelsrud & Lawrence H. Summers & Ella Getz Wold, 2019. "Negative Nominal Interest Rates and the Bank Lending Channel," NBER Working Papers 25416, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Stefan Kerbl & Katharina Steiner, 2020. "Austrian banks’ lending risk appetite in times of expansive monetary policy and tightening capital regulation," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 39, pages 89-109.
    2. Busch, Ramona & Memmel, Christoph, 2021. "Why are interest rates on bank deposits so low?," Discussion Papers 46/2021, Deutsche Bundesbank.
    3. Ramona Busch & Helge C. N. Littke & Christoph Memmel & Simon Niederauer, 2022. "German banks’ behavior in the low interest rate environment," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(3), pages 267-296, September.

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    More about this item

    Keywords

    interest rate risk; maturity transformation; low interest rate environment; risk quantification and management; bank capital;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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