TAILIEUCHUNG - Which interest rate scenario is the worst one for a bank? Evidence from a tracking bank approach for German savings and cooperative banks

Interest income is the most important source of revenue for most of the banks. The aim of this paper is to assess the impact of di erent interest rate scenarios on the banks' interest income. As we do not know the interest rate sensitivity of real banks, we construct for each bank a portfolio with a similar composition of its assets and liabilities, called 'tracking bank'. We evaluate the e ect of 260 historical interest rate shocks on the tracking banks of German savings banks and cooperative banks. It turns out that a sharp decrease in the steepness of the yield curve has the most negative impact on the. | . .DEUTSCHE . BUNDESBANK EUROSYSTEM Which interest rate scenario is the worst one for a bank Evidence from a tracking bank approach for German savings and cooperative banks Christoph Memmel Discussion Paper Series 2 Banking and Financial Studies No 07 2008 Discussion Papers represent the authors personal opinions and do not necessarily reflect the views of the Deutsche Bundesbank or its staff. Editorial Board Heinz Herrmann Thilo Liebig Karl-Heinz Todter Deutsche Bundesbank Wilhelm-Epstein-Strasse 14 60431 Frankfurt am Main Postfach 10 06 02 60006 Frankfurt am Main Tel 49 69 9566-1 Telex within Germany 41227 telex from abroad 414431 Please address all orders in writing to Deutsche Bundesbank Press and Public Relations Division at the above address or via fax 49 69 9566-3077 Internet http Reproduction permitted only if source is stated. ISBN 978-3-86558-404-5 Printversion ISBN 978-3-86558-405-2 Internetversion Abstract Interest income is the most important source of revenue for most of the banks. The aim of this paper is to assess the impact of different interest rate scenarios on the banks interest income. As we do not know the interest rate sensitivity of real banks we construct for each bank a portfolio with a similar composition of its assets and liabilities called tracking bank . We evaluate the effect of 260 historical interest rate shocks on the tracking banks of German savings banks and cooperative banks. It turns out that a sharp decrease in the steepness of the yield curve has the most negative impact on the banks interest income. JEL classification G12 G21 Keywords Interest Rate Risk Stress .

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