Do Banks Hedge Using Interest Rate Swaps?

Lihong McPhail, Philipp Schnabl and Bruce Tuckman

No 31166, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze whether banks use interest rate swaps to hedge the interest rate risk of their assets, primarily loans and securities. By examining regulatory data on individual swap positions from the largest 250 U.S. banks, we find that banks hold large swap positions with an average notional value of $434 billion. However, after accounting for offsetting swap positions, the average bank exhibits almost no net interest rate risk from swaps: a 100-basis-point increase in rates reduces the value of its swaps by only 0.1% of bank equity. The variation in swap positions across banks indicates that banks use swaps to hedge interest rate risk, thereby facilitating risk transfer within the banking sector. Additionally, we find that swap dealer banks primarily hold swap positions for market making, while non-dealer banks use swaps to meet borrower demand for fixed-rate loans. Despite the substantial notional amounts, our findings suggest that swap positions are not economically significant in hedging the overall interest rate risk of bank assets. Instead, banks primarily rely on their deposit franchise to hedge interest rate risk.

JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-ban, nep-fmk and nep-rmg
Note: AP CF
References: Add references at CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.nber.org/papers/w31166.pdf (application/pdf)

Related works:
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:nbr:nberwo:31166

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w31166

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().