Are Banks Exposed to Interest Rate Risk?

Paul, Pascal; Zhu, Simon

Journal Article

Are Banks Exposed to Interest Rate Risk?

Abstract: While banks seem to face inherent risk from short-term interest rate changes, in practice they structure their balance sheets to avoid exposure to such risk. Nonetheless, recent research finds that banks cannot offload all of the interest rate risk they are naturally exposed to. Historically, banks’ profit margins reflect their compensation for taking on interest rate risk and their stock prices are highly sensitive to changes in interest rates. These findings can help practitioners assess banks’ risk exposures and may have implications for unconventional monetary policy.

Keywords: term premiums; interest rate risk; stock prices; bank profit margins;