We study the allocation of interest rate risk within the European banking sector using novel data. Banks' exposure to … redistributive effects within the banking sector. …

and (ii) above 50% of hedging banks use derivatives to increase exposure. We model a bank's capital structure, and show … that these facts are consistent with optimal hedging under financial frictions. Novel predictions on the characteristics of …' derivatives exposures are not necessarily evidence of excessive risk-taking, and can be explained by hedging in the presence of …

filings shows that only 6% of U.S. banking assets used derivatives to hedge their interest rate risk, and even heavy users of …, focusing on short-term gains but risking further losses if rates rose. Instead of hedging the market value risk of bank asset … implications for regulatory capital accounting and risk management practices in the banking sector …