Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60477
Year of Publication: 
2012
Series/Report no.: 
Bundesbank Discussion Paper No. 17/2012
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
This paper explores the extent to which interest risk exposure is priced in bank margins. Our contribution to the literature is twofold: First, we present an extended model of Ho and Saunders (1981) that explicitly captures interest rate risk and returns from maturity transformation. Banks price interest risk according to their individual exposure separately in loan and deposit rates, but reduce these charges when they expect returns from maturity transformation. Second, using a comprehensive dataset covering the German universal banks between 2000 and 2009, we test the model-implied hypotheses not only for the commonly investigated net interest income, but additionally for interest income and expenses separately. Controlling for earnings from bank-individual maturity transformation strategies, we find all banks to charge additional fees for macroeconomic interest volatility exposure. Microeconomic on-balance interest risk exposure from maturity transformation, however, only affects the smaller savings and cooperative banks, but not private commercial banks. Returns are only priced in income margins.
Subjects: 
Interest rate risk
Interest margins
Maturity transformation
JEL: 
D21
G21
ISBN: 
978-3-86558-828-9
Document Type: 
Working Paper

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