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Market Interest Rates and Commercial Bank Profitability: An Empirical Investigation
Author(s) -
FLANNERY MARK J.
Publication year - 1981
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1981.tb01078.x
Subject(s) - profitability index , interest rate , liability , asset (computer security) , interest rate risk , sample (material) , economics , monetary economics , business , econometrics , financial economics , actuarial science , finance , chemistry , computer security , chromatography , computer science
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.