Federal Deposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2006-02
Interest Rate Risk Management at Commercial Banks:
An Empirical Analysis
Söhnke M. Bartram
Gregory W. Brown
John E. Hund
July 2005
December 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2006-02
Interest Rate Risk Management at Commercial Banks:
An Empirical Analysis
Söhnke M. Bartram
Gregory W. Brown
John E. Hund
July 2005
December 2005
1
Interest Rate Risk Management at Commercial
Banks: An Empirical Investigation
Amiyatosh Purnanandam*
Ross School of Business
University of Michigan
Ann Arbor, MI 48109
Email: amiyatos@umich.edu
May 2005
Abstract
I analyze the effects of bank characteristics an d macroeconomic shocks on interest rate risk-
management behavior of commercial banks. My findings are consistent with hedging theories
based on cost of financial distress and costly exte rnal financing. As compar ed to the derivative
users, the derivative non-user ba nks adopt conservative asset-lia bility management policies in
tighter monetary policy regimes. Finally, I sh ow that the derivative non-user bank’s lending
volume decline significantly with the contraction in the money-supply. Derivative users, on the
other hand, remain immune to th e monetary policy shocks. My fi ndings suggest that a potential
benefit of derivatives usage is to minimize the effect of external shocks on a firm’s operating
policies.
* An earlier version of the paper was circulated under the title ‘Do Banks Hedge in Response to the Financial
Distress Costs?” I would like to thank Warren Bailey, Allen Berger, Rosalind Bennett, Sreedhar Bharath, Murillo
Campello, Dennis Capozza, Sudheer Chava, Serdar Dinc, Yaniv Grinstein, Bob Jarrow , Ed Kane, Han Kim, Anil
Kumar, Paul Kupiec, Haitao Li, Patrick Morris, M P Narayanan, Mitch Petersen, Uday Rajan, Cathy Schrand,
Clemens Sialm, Nejat Seyhun, Jayanthi Sunder, Bhaskaran Swaminathan and seminar participants at Cornell,
FDIC/CFR workshop, FDIC/JFSR conference, University of Michigan and Western Finance Association’s meeting
at Los Cabos for their helpful comments. Financial support from FDIC’s Center for Financial Research is gratefully
acknowledged. All remaining errors are mine.
Interest Rate Risk Management at Commercial
Banks: An Empirical Investigation
Amiyatosh Purnanandam*
Ross School of Business
University of Michigan
Ann Arbor, MI 48109
Email: amiyatos@umich.edu
May 2005
Abstract
I analyze the effects of bank characteristics an d macroeconomic shocks on interest rate risk-
management behavior of commercial banks. My findings are consistent with hedging theories
based on cost of financial distress and costly exte rnal financing. As compar ed to the derivative
users, the derivative non-user ba nks adopt conservative asset-lia bility management policies in
tighter monetary policy regimes. Finally, I sh ow that the derivative non-user bank’s lending
volume decline significantly with the contraction in the money-supply. Derivative users, on the
other hand, remain immune to th e monetary policy shocks. My fi ndings suggest that a potential
benefit of derivatives usage is to minimize the effect of external shocks on a firm’s operating
policies.
* An earlier version of the paper was circulated under the title ‘Do Banks Hedge in Response to the Financial
Distress Costs?” I would like to thank Warren Bailey, Allen Berger, Rosalind Bennett, Sreedhar Bharath, Murillo
Campello, Dennis Capozza, Sudheer Chava, Serdar Dinc, Yaniv Grinstein, Bob Jarrow , Ed Kane, Han Kim, Anil
Kumar, Paul Kupiec, Haitao Li, Patrick Morris, M P Narayanan, Mitch Petersen, Uday Rajan, Cathy Schrand,
Clemens Sialm, Nejat Seyhun, Jayanthi Sunder, Bhaskaran Swaminathan and seminar participants at Cornell,
FDIC/CFR workshop, FDIC/JFSR conference, University of Michigan and Western Finance Association’s meeting
at Los Cabos for their helpful comments. Financial support from FDIC’s Center for Financial Research is gratefully
acknowledged. All remaining errors are mine.