Basis Risk and Net Interest Income of Banks

Mielus Piotr (), Mironczuk Tomasz () and Anna Zamojska ()
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Mielus Piotr: Warsaw School of Economics, Collegium of Economic Analysis, Department of Quantitative Economics, Madalińskiego 6/8, 02-513 Warszawa, Poland
Mironczuk Tomasz: Gdańsk Institute for Market Economics, Warsaw Branch, Kołobrzeska 16, 02-923 Warszawa, Poland

Folia Oeconomica Stetinensia, 2016, vol. 16, issue 2, 40-59

Abstract: The results of the banking sector are shaped primarily by commissions and net interest income. Net interest income is determined by the difference between the profitability of bank assets and liabilities. In the case when a different method is used to determine interest for each side of the balance sheet, there occurs a basis risk that may lead to the deterioration in the net interest income of the sector. This is the situation in the Polish banking sector, which is characterized by the presence of variable interest rates for long-term assets and fixed interest rates for short-term liabilities. The study aims to verify the following thesis: in an environment of falling interest rates we can observe the deterioration in net interest income of the banking sector, as a result of the materialization of the basis risk. The authors of the article state that the source of the basis risk is the mismatch between the reference rate used to define the interest flow of loans and the actual cost of financing the balance through term deposits collected from non-financial entities.

Keywords: net interest income of the bank; the cost of financing; interest rates on deposits; financial market indices (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:foeste:v:16:y:2016:i:2:p:40-59:n:4

DOI: 10.1515/foli-2016-0024

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