Arbeitspapier
Banks' option to lend, interest rate sensitivity, and credit availability
Interest rate risk is a major concern for banks because of the nominal nature of their assets and the asset-liability maturity mismatch.This paper proposes a new way to derive a bank's interest rate sensitivity, by examining separately the effects of interest rate changes on existing loans (loans-in-place) and potential loans (loans-in-process).A potential loan is shown to be equivalent to an American option to lend, and is valued using option theory.An increase in interest rates usually has a negative effect on existing loans.However, if both deposit and lending rates rise by the same amount, the value of a potential loan generally increases. Hence a bank's lending slack (ratio of loans-in-process to loans-in-place) will determine its overall interest rate risk. Empirical evidence indicates that low-slack banks indeed have significantly more interest rate risk than high-slack banks.The model also makes predictions regarding the effect of deposit and lending rate parameters on bank credit availability.Empirical tests with quarterly data are generally supportive of these predictions.
- ISBN
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951-686-791-X
- Language
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Englisch
- Bibliographic citation
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Series: Bank of Finland Discussion Papers ; No. 15/2002
- Classification
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Wirtschaft
- Subject
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interest rate risk
option to lend
bank's lending capacity
maturity intermediation
- Event
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Geistige Schöpfung
- (who)
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Hasan, Iftekhar
Sudipto, Sarkar
- Event
-
Veröffentlichung
- (who)
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Bank of Finland
- (where)
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Helsinki
- (when)
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2002
- Handle
- Last update
-
10.03.2025, 11:43 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Hasan, Iftekhar
- Sudipto, Sarkar
- Bank of Finland
Time of origin
- 2002
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