The Relationship Between Large Banks Investment In Available-For-Sale Securities And The Interest Rate Risk Of Their Securities

Abstract

This study presents an empirical examination of the relationship between large banks’ investment in available-for-sale securities (AFS) and the interest rate risk of their securities. It concentrates on the years, 1997-2000, when interest rates were relatively stable and regulatory capital was not affected by the unrealized holding gains and losses on AFS securities under Statement of Financial Accounting Standards No. 115. The two main findings of the study, having controlled for the interest risk position of the bank (exclusive of securities effect) and other risk management and economic considerations, are: (1) AFS securities’ ratio (to securities or to total assets) is positively related to the interest rate risk of securities; (2)a change in the AFS securities ratio is positively related to the change in the interest rate risk of securities. These findings may well prove to be significant to supervisors of banks considering they are in charge of monitoring the effect of fair value accounting regulations on the financial risk management in banks.