Risk Management in Financial Institutions

Adriano Rampini, S. Viswanathan and Guillaume Vuillemey

No 13787, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study risk management in financial institutions using data on hedging of interest rate and foreign exchange risk. We find strong evidence that institutions with higher net worth hedge more, controlling for risk exposures, both across institutions and within institutions over time. For identification, we exploit net worth shocks resulting from loan losses due to drops in house prices. Institutions that sustain such shocks reduce hedging significantly relative to otherwise similar institutions. The reduction in hedging is differentially larger among institutions with high real estate exposure. The evidence is consistent with the theory that financial constraints impede both financing and hedging.

Keywords: Risk management; Financial institutions; Interest rate risk; Foreign exchange risk; Financial constraints; Derivatives (search for similar items in EconPapers)
JEL-codes: D92 E44 G21 G32 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-mac and nep-rmg
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Citations: View citations in EconPapers (6)

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Working Paper: Risk Management in Financial Institutions (2019)
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