CAMEL to CAMELS: The risk of sensitivity
William C Handorf
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William C Handorf: School of Business, The George Washington University
Journal of Banking Regulation, 2016, vol. 17, issue 4, 273-287
Abstract Most bank regulatory regimes added interest rate risk or sensitivity to their examination focus in the mid-1990s. Interest rate risk significantly contributed to the demise of the US savings and loan industry in the 1980s and 1990s and that episode alone warranted additional focus on sensitivity. However, interest rate risk is not as important as asset quality to remaining a profitable and well-capitalized institution. We find that most US banks are liability-sensitive and that exposure has increased despite regulatory warnings to the contrary. The Basel Committee on Banking Supervision has also expressed renewed concern with interest rate risk. We find that small and community bank net interest margins are affected by interest rates, mortgage prepayment and loan demand. By contrast, large banks hedge much of their interest rate risk but are adversely affected by basis risk. Even if the regulatory agencies had not added ‘S’ to CAMEL two decades ago, the equity market would force management to monitor, measure and control interest rate risk.
Keywords: banking; regulation; interest rate risk sensitivity (search for similar items in EconPapers)
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