Do Banks Hedge Using Interest Rate Swaps? / Lihong McPhail, Philipp Schnabl, Bruce Tuckman.

Format:

Book

Author/Creator:

McPhail, Lihong.

Contributor:

National Bureau of Economic Research.

Schnabl, Philipp.

Tuckman, Bruce.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31166.

NBER working paper series no. w31166

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

We ask whether banks use interest rate swaps to hedge the interest rate risk of their assets, primarily loans and securities. To this end, we use regulatory data on individual swap positions for the largest 250 U.S. banks. We find that the average bank has a large notional amount of $434 billion. But after accounting for the significant extent to which swap positions offset each other, the average bank has essentially no net interest rate risk from swaps: a 100-basis-point increase in rates increases the value of its swaps by 0.1% of equity. There is variation across banks, with some bank swap positions decreasing and some increasing with rates, but aggregating swap positions at the level of the banking system reveals that most swap exposures are offsetting. Therefore, as a description of prevailing practice, we conclude that swap positions are not economically significant in hedging the interest rate risk of bank assets.

Notes:

Print version record

April 2023.