Banks' Interest Rate Risk Exposure Under Low Rates: Tracing Exposure from Balance Sheet Positions

Abstract: Has the risk exposure of banks changed in response to low interest rates? We construct simple factor portfolios using the fair values of positions held by the U.S. banking sector in order to trace the interest rate exposure of individual positions on banks' balance sheets between 2001-2019. We find that the U.S. banking sector is more exposed to interest rate risk in the years after the financial crisis, a period characterised by low interest rates. The increased exposure can be observed across the majority of positions on the balance sheet. In particular, we distinguish trends of more long-term maturity contracts and more high-risk loans. We also find that the U.S. banking sector holds more assets and liabilities across the entire balance sheet, which contributes to increased exposure.