Book Value Risk Management of Banks: Limited Hedging, HTM Accounting, and Rising Interest Rates
Joao Granja,
Erica Xuewei Jiang,
Gregor Matvos,
Tomasz Piskorski and
Amit Seru
Additional contact information
Joao Granja: U of Chicago
Erica Xuewei Jiang: U of Southern California
Gregor Matvos: Northwestern U
Tomasz Piskorski: Columbia U
Research Papers from Stanford University, Graduate School of Business
Abstract:
In the face of rising interest rates in 2022, banks mitigated interest rate exposure of the accounting value of their assets but left the vast majority of their long-duration assets exposed to interest rate risk. Data from call reports and SEC filings shows that only 6% of U.S. banking assets used derivatives to hedge their interest rate risk, and even heavy users of derivatives left most assets unhedged. The banks most vulnerable to asset declines and solvency runs decreased existing hedges, focusing on short-term gains but risking further losses if rates rose. Instead of hedging the market value risk of bank asset declines, banks used accounting reclassification to diminish the impact of interest rate increases on book capital. Banks reclassified $1 trillion in securities as held-to-maturity (HTM) which insulated these assets book values from interest rate fluctuations. More vulnerable banks were more likely to reclassify. Extending Jiang et al.’s (2023) solvency bank run model, we show that capital regulation could address run risk by encouraging capital raising, but its effectiveness depends on the regulatory capital definitions and can by eroded by the use of HTM accounting. Including deposit franchise value in regulatory capital calculations without considering run risk could weaken capital regulation’s ability to prevent runs. Our findings have implications for regulatory capital accounting and risk management practices in the banking sector.
JEL-codes: G20 G21 G28 (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-acc and nep-fdg
References: Add references at CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
https://www.gsb.stanford.edu/faculty-research/work ... dging-htm-accounting
Related works:
Working Paper: Book Value Risk Management of Banks: Limited Hedging, HTM Accounting, and Rising Interest Rates (2024) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:4182
Access Statistics for this paper
More papers in Research Papers from Stanford University, Graduate School of Business Contact information at EDIRC.
Bibliographic data for series maintained by ().