Interest Rate Risk in Banking

Peter DeMarzo, Arvind Krishnamurthy and Stefan Nagel

No 11581, CESifo Working Paper Series from CESifo

Abstract: We develop a framework to estimate bank franchise value. Contrary to existing models, sticky deposits and low deposit rate betas do not imply negative duration. While operating costs could generate negative duration, they are offset by fixed interest rate spreads from lending activity. Consequently, franchise value declines as interest rates rise, further exacerbating losses on banks’ securities holdings. Banks with less responsive deposit rates tend to invest more in long-term securities, aiming to hedge cash flows rather than market value. Despite significant recent rate hike losses, most U.S. banks still retain sufficient franchise value to remain solvent, justifying forbearance.

Keywords: interest rate risk; bank franchise value; bank solvency; deposit beta (search for similar items in EconPapers)
JEL-codes: E43 G21 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp11581.pdf (application/pdf)

Related works:
Working Paper: Interest Rate Risk in Banking (2024)
Working Paper: Interest Rate Risk in Banking (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:ces:ceswps:_11581

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().