Interest rate derivatives at commercial banks: An empirical investigation ¬リニ

I analyze the effects of bank characteristics and macroeconomic shocks on interest rate riskmanagement behavior of commercial banks. My findings are consistent with hedging theories based on cost of financial distress and costly external financing. Banks with higher probability of financial distress manage their interest rate risk more aggressively, both by means of on-balance sheet and offbalance sheet instruments. As compared to the derivative users, the derivative non-user banks adopt conservative asset–liability management policies in tighter monetary policy regimes. Finally, I show that the derivative non-user bank’s lending volume declines significantly with the contraction in the money supply. Derivative users, on the other hand, remain immune to the monetary policy shocks. ARTICLE IN PRESS www.elsevier.com/locate/jme 0304-3932/$ see front matter r 2006 Elsevier B.V. All rights reserved. doi:10.1016/j.jmoneco.2006.07.009 This paper is based on a chapter of my doctoral dissertation at Cornell University. Earlier versions of the paper were circulated under the titles ‘Do Banks Hedge in Response to the Financial Distress Costs?’’ and ‘‘Interest Rate Risk Management at Commercial Banks: An Empirical Estimation’’. I would like to thank Dave Backus (the editor), three anonymous referees, George Allayannis, Warren Bailey, Allen Berger, Rosalind Bennett, Sreedhar Bharath, Sugato Bhattacharya Murillo Campello, Dennis Capozza, Sudheer Chava, Serdar Dinc, Yaniv Grinstein, Bob Jarrow, Ed Kane, Han Kim, Anil Kumar, Paul Kupiec, Haitao Li, Bernadette Minton, Patrick Morris, M.P. Narayanan, Mitch Petersen, Uday Rajan, Clemens Sialm, Nejat Seyhun, Jayanthi Sunder, Bhaskaran Swaminathan and seminar participants at Cornell, FDIC/CFR workshop, FDIC/JFSR conference, University of Michigan and Western Finance Association’s meeting at Los Cabos for their helpful comments. I am indebted to N.K. Chidambaran, Robert Hauswald, Cathy Schrand and Haluk Unal for their discussions of this paper at various conferences and Adam Ashcraft and Mark Flannery for sharing useful data with me for this study. Financial support from FDIC’s Center for Financial Research is gratefully acknowledged. All remaining errors are mine. Tel.: +1 734 764 6886. E-mail address: [email protected]. My findings suggest that a potential benefit of derivatives usage is to minimize the effect of external shocks on a firm’s operating policies. r 2006 Elsevier B.V. All rights reserved.