Quantifying interest rate risk and the effect of model assumptions behind sight deposits

Have Austrian banks taken on higher interest rate risks amid the low interest rate environment? According to the interest rate risk statistics, which quantify the effect of the regulatory 200-basis-point interest rate shock, interest rate risk as reported by banks has not risen significantly since the beginning of the low interest rate period. However, in measuring interest rate risk, banks need to rely on model assumptions, especially with regard to the repricing dates they assume for customer deposits. Harnessing this room for maneuver, banks may compensate for longer fixation periods on the assets side (maturity transformation). In turn, a higher degree of maturity transformation and interest rate sensitivity might not be fully reflected in the reported interest rate risk. Analyzing this room for maneuver, we calculate Austrian banks’ interest rate risk level over time while assuming standardized and conservative repricing dates. Under these conservative repricing dates, a different picture on interest rate risks emerges especially for large banks. We conclude that large banks in Austria have seen a marked increase in maturity transformation over time, which was mirrored by small and medium-sized banks to a lesser extent. It follows that interest rate risk in the banking book, and its quantification, is now more relevant for evaluating banks’ business models and capital adequacy than was the case before the start of the low interest rate phase.