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 - Ecole des Hautes Etudes Commerciales
Sanjeev Bhojraj: CU - Cornell University [Ithaca, NY, USA]
Yao Lu: CU - Cornell University [Ithaca, NY, USA]
Shuyan Wang: UMN - University of Minnesota [Twin Cities] - UMN - University of Minnesota System

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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)
Date: 2026-09-01
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-05736795

DOI: 10.2139/ssrn.7369340

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