impact of interest rate risk on the spanish banking sector

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1、ImpactofinterestrateriskontheSpanishbankingsectorLauraBallester,RomanFerrer,andCrist´obalGonz´alez´Abstract.ThispaperexaminestheexposureoftheSpanishbankingsectortointerestraterisk.Withthataim,aunivariateGARCH-Mmodel,whichtakesintoaccountnotonlytheimpactofinterestratechangesbut

2、alsotheeffectoftheirvolatilityonthedistributionofbankstockreturns,isused.TheresultsshowthatbothchangesandvolatilityofinterestrateshaveanegativeandsignificantimpactonthestockreturnsoftheSpanishbankingindustry.Moreover,thereseemstobeadirectrelationshipbetweenthesizeofbankingfirmsa

3、ndtheirdegreeofinterestratesensitivity.Keywords:interestraterisk,bankingfirms,stocks,volatility1IntroductionInterestraterisk(IRR)isoneofthekeyformsoffinancialriskfacedbybanks.Thisriskstemsfromtheirroleasfinancialintermediariesandithasbeenattributedtotwomajorreasons.First,intheirb

4、alancesheets,banksprimarilyholdfinancialassetsandliabilitiescontractedinnominalterms.Second,bankstraditionallyperformamatu-ritytransformationfunctionusingshort-termdepositstofinancelong-termloans.Theresultingmaturitymismatchintroducesvolatilityintobanks’incomeandnetworthasintere

5、strateschange,andthisisoftenseenasthemainsourceofbankIRR.Inrecentyears,IRRmanagementhasgainedprominenceinthebankingsectorduetothefactthatinterestrateshavebecomesubstantiallymorevolatileandtheincreasingconcernaboutthistopicunderthenewBaselCapitalAccord(BaselII).Themostcommonapp

6、roachtomeasuringbankinterestrateexposurehasconsistedofestimat-ingthesensitivityofbankstockreturnstointerestratefluctuations.TheknowledgeoftheeffectofinterestratevariabilityonbankstocksisimportantforbankmanagerstoadequatelymanageIRR,investorsforhedgingandassetallocationpurposes,

7、andbankingsupervisorstoguaranteethestabilityofthebankingsystem.Themainob-jectiveofthispaperistoinvestigatetheinterestrateexposureoftheSpanishbankingindustryataportfoliolevelbyusingtheGARCH(generalisedautoregressivecondi-tionalheteroskedasticity)methodology.Itsmajorcontribution

8、istoexamineforthefirsttimeintheSpanishcasethejointimpactofinte