Hedge Accounting and Banks' Interest Rate Risk Management

Waqar Ali, Sanjeev Bhojraj, Yao Lu and Shuyan Wang
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Waqar Ali: HEC Paris - Accounting and Management Control Department
Sanjeev Bhojraj: Cornell University - Samuel Curtis Johnson Graduate School of Management
Yao Lu: Cornell University - Samuel Curtis Johnson Graduate School of Management
Shuyan Wang: University of Minnesota - Twin Cities, Carlson School of Management

No 1657, HEC Research Papers Series from HEC Paris

Abstract: We study how relaxing hedge accounting requirements under ASU 2017-12 affects banks' interest rate risk management. Banks significantly increase their use of hedge-accounted interest rate derivatives following the standard change. The standard change increases banks' holdings of longer-term loans, widening their asset-liability duration gap. Meanwhile, it leads to inflows of uninsured deposits and lower sensitivity of interest expense to changes in market rates, indicating a strengthened "deposit franchise." In exploring the motives behind banks' responses, we find that adopting ASU 2017-12 does not further reduce banks' already low interest rate risk exposure. Instead, it increases banks' interest income, while helping financially weaker banks better manage liquidity risk. Overall, our findings suggest that banks leverage ASU 2017-12 as an opportunity to undertake a broad, coordinated adjustment to their asset allocation and risk management strategies.

Keywords: Bank; Interest Rate Risk; Derivatives; Hedge Accounting; ASU 2017-12; Asset Allocation; Deposit Franchise (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 M41 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2026-09-01
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1657

DOI: 10.2139/ssrn.7369340

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