Interest Rate Risk in Banking

Peter DeMarzo, Arvind Krishnamurthy and Stefan Nagel

No 33308, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G2 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-fmk and nep-mon
Note: AP CF ME
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w33308.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

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:nbr:nberwo:33308

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w33308
The price is Paper copy available by mail.

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 ().