IDEAS home Printed from https://ideas.repec.org/a/vrs/foeste/v16y2016i2p40-59n4.html
   My bibliography  Save this article

Basis Risk and Net Interest Income of Banks

Author

Listed:
  • Mielus Piotr

    (Warsaw School of Economics, Collegium of Economic Analysis, Department of Quantitative Economics, Madalińskiego 6/8, 02-513 Warszawa, Poland)

  • Mironczuk Tomasz

    (Gdańsk Institute for Market Economics, Warsaw Branch, Kołobrzeska 16, 02-923 Warszawa, Poland)

  • Zamojska Anna

    (University of Gdańsk, Faculty of Management, Department of Econometrics, Armii Krajowej 101, 81-824 Sopot, Poland)

Abstract

The results of the banking sector are shaped primarily by commissions and net interest income. Net interest income is determined by the difference between the profitability of bank assets and liabilities. In the case when a different method is used to determine interest for each side of the balance sheet, there occurs a basis risk that may lead to the deterioration in the net interest income of the sector. This is the situation in the Polish banking sector, which is characterized by the presence of variable interest rates for long-term assets and fixed interest rates for short-term liabilities. The study aims to verify the following thesis: in an environment of falling interest rates we can observe the deterioration in net interest income of the banking sector, as a result of the materialization of the basis risk. The authors of the article state that the source of the basis risk is the mismatch between the reference rate used to define the interest flow of loans and the actual cost of financing the balance through term deposits collected from non-financial entities.

Suggested Citation

  • Mielus Piotr & Mironczuk Tomasz & Zamojska Anna, 2016. "Basis Risk and Net Interest Income of Banks," Folia Oeconomica Stetinensia, Sciendo, vol. 16(2), pages 40-59, December.
    • Handle: RePEc:vrs:foeste:v:16:y:2016:i:2:p:40-59:n:4
    DOI: 10.1515/foli-2016-0024
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/foli-2016-0024
    Download Restriction: no
    File URL: https://libkey.io/10.1515/foli-2016-0024?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Demirguc, Asli & Huizinga, Harry, 1999. "Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence," The World Bank Economic Review, World Bank, vol. 13(2), pages 379-408, May.
    2. Inci Ötker & Ceyla Pazarbasioglu, 2010. "Impact of Regulatory Reforms on Large and Complex Financial Institutions," IMF Staff Position Notes 2010/16, International Monetary Fund.
    3. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 581-600, November.
    4. William B English, 2002. "Interest rate risk and bank net interest margins," BIS Quarterly Review, Bank for International Settlements, December.
    5. V. Brousseau & Alexandre Chailloux & Alain Durré, 2013. "Fixing the Fixings: What Road to a More Representative Money Market Benchmark?," IMF Working Papers 2013/131, International Monetary Fund.
    6. Konstantijn Maes, 2004. "Interest Rate Risk in the Belgian Banking Sector," Financial Stability Review, National Bank of Belgium, vol. 2(1), pages 157-179, June.
    7. Cabral, Ricardo, 2013. "A perspective on the symptoms and causes of the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 103-117.
    8. Ms. Inci Ötker & Ceyla Pazarbasioglu, 2010. "Impact of Regulatory Reforms on Large and Complex Financial Institutions," IMF Staff Position Notes 2010/016, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Molyneux, Philip & Reghezza, Alessio & Xie, Ru, 2019. "Bank margins and profits in a world of negative rates," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    2. Dietrich, Andreas & Hess, Kurt & Wanzenried, Gabrielle, 2014. "The good and bad news about the new liquidity rules of Basel III in Western European countries," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 13-25.
    3. Afzal Ahmed & Raja Rehan & Imran Umer Chhapra & Saima Supro, 2018. "Interest Rate and Financial Performance of Banks in Pakistan," International Journal of Applied Economics, Finance and Accounting, Online Academic Press, vol. 2(1), pages 1-7.
    4. Claessens, Stijn & Coleman, Nicholas & Donnelly, Michael, 2018. "“Low-For-Long” interest rates and banks’ interest margins and profitability: Cross-country evidence," Journal of Financial Intermediation, Elsevier, vol. 35(PA), pages 1-16.
    5. Claudio Borio & Leonardo Gambacorta & Boris Hofmann, 2017. "The influence of monetary policy on bank profitability," International Finance, Wiley Blackwell, vol. 20(1), pages 48-63, March.
    6. Philip Molyneux & Alessio Reghezza & Ru Xie, 2018. "Bank Profits and Margins in a World of Negative Rates," Working Papers 18001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    7. Claessens, Stijn & Coleman, Nicholas & Donnelly, Michael, 2017. ""Low-For-Long†Interest Rates and Banks’ Interest Margins and Profitability: Cross-Country Evidence," CEPR Discussion Papers 11842, C.E.P.R. Discussion Papers.
    8. Albertazzi, Ugo & Gambacorta, Leonardo, 2009. "Bank profitability and the business cycle," Journal of Financial Stability, Elsevier, vol. 5(4), pages 393-409, December.
    9. Koffie Ben Nassar & Edder Martinez & Anabel Pineda, 2014. "Determinants of Banks' Net Interest Margins in Honduras," IMF Working Papers 2014/163, International Monetary Fund.
    10. Ms. Laura Valderrama & Mr. Wendell A. Samuel, 2006. "The Monetary Policy Regime and Banking Spreads in Barbados," IMF Working Papers 2006/211, International Monetary Fund.
    11. Albert DePrince & Pamela Morris, 2007. "A longitudinal study of net interest margin by bank asset size: 1992–2005," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 31(1), pages 20-32, March.
    12. Tarsila Segalla Afanasieff & Priscilla Maria Villa Lhacer & Márcio I. Nakane, 2002. "The Determinants of Bank Interest Spread in Brazil," Money Affairs, CEMLA, vol. 0(2), pages 183-207, July-Dece.
    13. Yanikkaya, Halit & Gumus, Nihat & Pabuccu, Yasar Ugur, 2018. "How profitability differs between conventional and Islamic banks: A dynamic panel data approach," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 99-111.
    14. Nguena Christian Lambert & Tsafack Nanfosso Roger, 2014. "On the Sensitivity of Banking Activity Shocks: Evidence from the CEMAC Sub-region," Economics Bulletin, AccessEcon, vol. 34(1), pages 354-372.
    15. Norman Zakiyy & Kamal Halili Hassan, 2016. "The Management Process at the Pretrial Stage under Malaysian Rules of Court 2012," European Journal of Economics and Business Studies Articles, Revistia Research and Publishing, vol. 2, ejes_v2_i.
    16. Pankaj Sinha & Sakshi Sharma, 2016. "Determinants of bank profits and its persistence in Indian Banks: a study in a dynamic panel data framework," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 7(1), pages 35-46, March.
    17. Robin, Iftekhar & Salim, Ruhul & Bloch, Harry, 2018. "Financial performance of commercial banks in the post-reform era: Further evidence from Bangladesh," Economic Analysis and Policy, Elsevier, vol. 58(C), pages 43-54.
    18. Poghosyan, Tigran, 2010. "Re-examining the impact of foreign bank participation on interest margins in emerging markets," Emerging Markets Review, Elsevier, vol. 11(4), pages 390-403, December.
    19. Klára Baková, 2018. "The Financial Accelerator in Europe after the Financial Crisis," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 4(2), pages 143-155.
    20. Beck, Thorsten & Hesse, Heiko, 2006. "Bank efficiency, ownership, and market structure : why are interest spreads so high in Uganda ?," Policy Research Working Paper Series 4027, The World Bank.

    More about this item

    Keywords

    net interest income of the bank; the cost of financing; interest rates on deposits; financial market indices;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:vrs:foeste:v:16:y:2016:i:2:p:40-59:n:4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.sciendo.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.