Bank interest rate risk management and valuation of earnings

This paper examines banks’ interest rate risk management and its effects on the persistence and valuation of earnings. We first develop a novel measure of interest rate risk management by incorporating asymmetric changes in interest rates on assets and liabilities in response to market rate changes....

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Bibliographic Details
Published inAccounting and finance (Parkville) Vol. 61; no. 3; pp. 4287 - 4337
Main Authors Burke, Qing L., Warfield, Terry D.
Format Journal Article
LanguageEnglish
Published Clayton Blackwell Publishing Ltd 01.09.2021
Subjects
Bank holding companies
Earnings valuation
Interest income
Interest rate risk management
Interest rates
Net interest income
Risk management
Valuation
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Summary:This paper examines banks’ interest rate risk management and its effects on the persistence and valuation of earnings. We first develop a novel measure of interest rate risk management by incorporating asymmetric changes in interest rates on assets and liabilities in response to market rate changes. Utilising this measure, we document that U.S. bank holding companies with more effective interest rate risk management have more persistent net interest income and a higher valuation of net interest income. This study helps investors and regulators assess banks’ interest rate risk management from the earnings perspective and the sustainability of net interest income.
ISSN:0810-5391
1467-629X
DOI:10.1111/acfi.12733