Title

Testing the effectiveness of regulatory interest rate risk measurement

Abstract

A depository institution's interest rate risk (IRR) exposure is the sensitivity of its earnings or market value of equity to changes in interest rates. Since the mid-1980's, bank regulators have developed broadly applied, centralized IRR models which are used to help assess individual institutions' capital adequacy. This paper tests the effectiveness of the earliest of these regulatory IRR models: the income-gap estimates calculated by the Federal Home Loan Bank Board (FHLBB) during the latter 1980's. Despite the many problems caused by the broad application of generic assumptions and the presence of embedded options, we find that the FHLBB gap estimates provided a significant measure of IRR exposure. We believe that these results bode well for the success of ongoing, more sophisticated regulatory modeling efforts.

Publication Date

1-1-1997

Publication Title

Journal of Economics and Finance

Volume

21

Issue

2

Number of Pages

27-37

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1007/BF02920761

Socpus ID

33750977211 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/33750977211

This document is currently not available here.

Share

COinS