Manchester Metropolitan University
The Graduate Business School
The Use of Interest Rate Swaps by Commercial Banks
Graduate Business School Minshall Building Accounting and Finance Chorlton Street Manchester Lboukrami@hotmail.com
The need for the management of interest rate risk has driven bank managers to use new financial tools. Banks interest rate exposure associated with a mismatch between assets and liabilities can be measured using traditional GAP and duration GAP analysis. Derivatives instruments are new tools used by banks in order to adjust the amount of assumed interest rate risk. These instruments include interest rate swaps, interest rate futures and forward rate agreements. This study using annual data for the year 2001 tried to shed some light on the pattern of interest rate swap use for asset liability purposes by a number of leading US Commercial banks. Thus the banks’ specific characteristics (size, asset quality, capitalisation, profitability, interest rate risk profile) are regressed against the notional amount of the interest are swaps reported as hedging activities. The results suggests that larger banks (as measured by the number of total assets) tend to use interest rate swaps more intensively than smaller banks. In addition, the study has found that banks with better asset quality tend to be more intensive users of interest rate swaps than those with weaker asset quality. Finally the study found that banks with high capitalisation are bigger users of the interest rate swaps than those with lower capitalisation.
1. Background of the Study:
Banks like any profit maximising organisation confront a variety of risks which we can classify into two broad categories, namely macroeconomic risks (for example, the effects of recession) and microeconomic risks (for example, new competitive threats). However, there is a number of risks banks face that are atypical of non financial firms. These risks can...