Working Paper: NBER ID: w21334
Authors: Juliane Begenau; Monika Piazzesi; Martin Schneider
Abstract: This paper studies U.S. banks' exposure to interest rate and credit risk. We exploit the factor structure in interest rates to represent many bank positions in terms of simple factor portfolios. This approach delivers time varying measures of exposure that are comparable across banks as well as across the business segments of an individual bank. We also propose a strategy to estimate exposure due to interest rate derivatives from regulatory data on notional and fair values together with the history of interest rates. We use the approach to document stylized facts about the recent evolution of bank risk taking.
Keywords: banks; risk exposure; interest rate risk; credit risk
JEL Codes: E4; E43; E58; G0; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banks' exposure to interest rate risk (G21) | Loss for banks (G21) |
| Holdings of securities (G12) | Banks' exposure to interest rate risk (G21) |
| One standard deviation negative realization of interest rate risk factor (E43) | Loss for banks (G21) |
| Banks' credit risk exposure (G21) | Loss for banks (G21) |
| Repeal of the Glass-Steagall Act (G28) | Increased interest rate risk exposure (E43) |
| Use of derivatives (C69) | Risk-taking across banks (G21) |
| Risk-taking across banks (G21) | Heterogeneity in risk-taking (D81) |