MATT BRIGIDA
Associate Professor of Finance (SUNY Polytechnic Institute)
Unlike 2008, the 2023 crisis was driven by the effect of interest rate risk on uninsured deposits
This panel-data analysis investigates the factors affecting bank-quarter level amounts on uninsured deposits.
Jiang et al (2003) investigate the use of interest rate hedges around the 2022 interest rate increases. They find about 25% of banks use interest rate swaps, however they only hedge 4% of assets on average.
Chang et al (2003) find banks with higher levels of uninsured deposits were riskier before the 2023 crisis.
I use FDIC quarterly Call report data downloaded via the FDIC Bankfind API.
Data from 2002 through 2023.
It has been commonly thought banks are necessarily exposed to interest rate risk.
Recent research found evidence that the deposit franchise hedges interest rate risk in bank assets.
The bank's investment in buildings, IT, advertising, and salaries allows it to pay depositors:
$$r^d_t = \beta^{Dep} f_t$$where $r^d_t$ is the deposit rate, $f_t$ is the short-rate (fed funds) and $\beta^{Dep} \in (0,1)$. $\beta^{Dep}$ is the Deposit Beta
$IntInc_{dt} = \alpha^{Inc}_{d,t} + \beta^{Inc}_{d,0,t} FedFunds_{t} +$
$+ \beta^{Inc}_{d,1,t} FedFunds_{t-1} + \epsilon_{dt}$
and we report:
$\beta^{Inc}_{d,t} = \beta^{Inc}_{d,0,t} + \beta^{Inc}_{d,1,t}$
$IntExp_{dt} = \alpha^{Exp}_{d,t} + \beta^{Exp}_{d,0,t} FedFunds_{t} +$
$+ \beta^{Exp}_{d,1,t} FedFunds_{t-1} + \epsilon_{dt}$
and we report:
$\beta^{Exp}_{d,t} = \beta^{Exp}_{d,0,t} + \beta^{Exp}_{d,1,t}$