Market Interest Rates and Commercial Bank Profitability: An Empirical Investigation
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- Author(s): MARK J. FLANNERY
- Published: Apr 30, 2012
- Pages: 1085-1101
- DOI: 10.1111/j.1540-6261.1981.tb01078.x
The widespread notion that commercial banks “borrow short and lend long” implies that sharp market interest rate increases may induce a significant number of banking failures. This paper develops a method for estimating average asset and liability maturities for a sample of large money center banks. Regression models are tested to determine if market rate fluctuations have a significant impact on bank profitability. The conclusion is negative: large banks have effectively hedged themselves against market rate risk by assembling asset and liability portfolios with similar average maturities.