Banks' Economic Risk Exposures in a Low Interest Rate Environment

Abstract: This paper studies banks' economic risk exposures over time using daily frequency data. We find that the theoretical risk factors banks are exposed to, credit risk and interest rate risk, are alone unsuccessful in explaining variation in bank equity returns. We confirm that banks' interest rate exposure has reversed in the low interest rate environment after the financial crisis. By examining the attributes of banks with the largest negative reaction to decreases in interest rates after the financial crisis, our results indicate that large, profitable, deposit-reliant banks are main contributors to this reversal.