Banking And Finance

Market timing, maturity mismatch, and risk management: evidence from the banking industry

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We investigate financial intermediaries’ interest rate risk management as the simultaneous
decision of on-balance-sheet exposure and interest rate swap use. Our
findings show that both decisions are substitute risk management strategies. A
higher likelihood of bank distress makes banks reduce their on-balance sheet interest
rate exposure and simultaneously intensify their swap use. Exogeneity tests
indicate that both decisions are only endogenous to each other for banks that start
using swaps for the first time. For other banks, the maturity gap is endogenous to
the decision to use swaps, but the reverse relationship is exogenous. For banks with
trading activity, both decisions are exogenous to each other. We interpret these
findings as the maturity gap being largely determined by customer liquidity needs,
whereas the decision to use swaps relies on compliance with the interest rate risk
regulation. Although hedging motives dominate, we find selective hedging behavior
in swap use driven by the slope of the yield curve as well as by funding uncertainty

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: .,

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1-47

Language

English

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NONE

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Subject(s)

Market timing, maturity mismatch, and risk managem

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