This study first investigates why only some banks use the internal models (IMs) introduced by Basel II that lead to more risk-sensitive capital ratios than standardized approaches (SA). I predict that banks opt for an IM if it allows economizing on capital requirements, given their underlying...

We estimate risk-free interest rates unaffected by convenience yields on safe assets. We infer them from risky asset prices without relying on any specific model of risk. We obtain a term structure of convenience yields with maturities up to 2.5 years at a minutely frequency. The convenience...

We show that maturity transformation does not expose banks to interest rate risk---it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is...

We introduce a robust investment strategy to hedge long dated liabilities under model misspecification and incomplete bond markets. A robust agent who worries about misspecified bond premia follows a min-max expected shortfall criterion to protect against model uncertainty. We employ a backward...

We use a two factor model of life insurer stock returns to measure interest rate risk at U.S. and U.K. insurers. Our estimates show that interest rate risk among U.S. life insurers increased as interest rates decreased to historically low levels in recent years. For life insurers in the U.K., in...

We exploit a unique dataset that features both un-intermediated mortgage requests and independent responses from multiple banks to each request. We show that households typically are not prudent risk managers, but prioritize minimizing current mortgage payments over insurance against future rate...

We present a coherent management framework for non-maturity accounts to derive the hedging strategy from the marketing strategy to generate stable net interest income. Our framework consists of three building blocks: (1) a discrete-time dynamic term structure model for the evolution of interest...

We study the allocation of interest rate risk within the European banking sector using novel data. Banks' exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. In contrast to conventional wisdom, net worth is increasing in interest rates for approximately...

We disentangle the demand and supply determinants of mortgage rate fixation periods. Our unique dataset features offers from multiple banks for each individual mortgage request. We how that households respond to the relative cost of different fixation periods. However, we also find that banks...

Interest rate risk measurement and management of non-maturity deposit balances presents a challenge for practitioners and academic researchers as well. The paper provides a review of several methodological approaches focusing on the area of savings accounts rate sensitivity modeling and...