Interest Rate Risk in Banking: A Survey

50 Pages Posted: 29 Dec 2015 Last revised: 23 Jul 2016

Date Written: July 22, 2016

Abstract

This paper surveys the theoretical and empirical literature on interest rate risk in banking. Theoretically, it considers the origins of interest rate risk and its allocation. Interest rate risk is non-diversifiable and does not originate from the banking sector, but from the potential time inconsistency between future aggregate demand and supply of consumption goods. Empirically, we discuss measurement and stylized facts. Banks bear part of total interest rate risk, but also engage in risk management and risk-sharing with non-financial agents. They transfer large amounts of risk to households and firms, by writing interest rate-contingent loan and deposit contracts. We consider the determinants of the aggregate exposure to interest rate risk and the pricing of marginal units of risk. Finally, interest rate policy, both conventional and non-conventional, is discussed.

Keywords: Interest rate risk, Maturity mismatching, Interest rate, Investment, Consumption, Monetary policy

JEL Classification: E43, G21

Suggested Citation

Vuillemey, Guillaume, Interest Rate Risk in Banking: A Survey (July 22, 2016). Available at SSRN: https://ssrn.com/abstract=2708804 or http://dx.doi.org/10.2139/ssrn.2708804

Guillaume Vuillemey (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Libération
Paris, Not Applicable 78351
France
+33660204275 (Phone)

HOME PAGE: http://sites.google.com/site/guillaumevuillemey/home

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