#96-53
"Derivative Exposure and the Interest Rate and Exchange Rate Risks of U.S. Banks"
Abstract: This paper estimates the interest rate and exchange rate risk betas of fifty-nine large U. S. commercial banks for the period of 1975-1992, as well as the bank-specific determinants of these betas. The estimation procedure uses a modified seemingly unrelated simultaneous method that recognizes cross-equation dependencies and adjusts for serial correlation and heteroskedasticity. Overall, the exchange rate risk betas are more significant than the interest rate risk betas. More importantly, we find a link between the scale of a bank's interest rate and currency derivative contracts and the bank's interest rate and exchange rate risks. Particularly noteworthy is the influence of currency derivatives on exchange rate betas.
Keywords: Off-balance sheet, Bank risk Derivatives, Interest rate risk, Exchange risk exposure
JEL classification: G2, Gl, F3
This paper was presented at the Financial Institutions Center's October 1996 conference on "Risk Management in Banking."
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