Risk Management in Financial Institutions
We study risk management in financial institutions using data on hedging of interest rate and foreign exchange risk. We find strong evidence that institutions with higher net worth hedge more, controlling for risk exposures, both across institutions and within institutions over time. For identification, we exploit net worth shocks resulting from loan losses due to drops in house prices. Institutions that sustain such shocks reduce hedging significantly relative to otherwise similar institutions. The reduction in hedging is differentially larger among institutions with high real estate exposure. The evidence is consistent with the theory that financial constraints impede both financing and hedging.
We thank Manuel Adelino, Juliane Begenau, Markus Brunnermeier, Mark Flannery, Dalida Kadyrzhanova, Divya Kirti, Kebin Ma, Justin Murfin, Dimitris Papanikolaou, Roberta Romano, Farzad Saidi, João Santos, David Scharfstein, Jeremy Stein, Jason Sturgess, Amir Sufi, Adi Sunderam, Yuri Tserlukevich, James Vickery, and seminar participants at Duke, HEC Paris, Princeton, Georgia State, the Federal Reserve Bank of New York, the NBER Insurance and Corporate Finance Joint Meeting, the FIRS Conference, the NYU-NY Fed-RFS Conference on Financial Intermediation, the ETH-NYU Law & Banking/Finance Conference, the Paul Woolley Centre Conference at LSE, the LBS Summer Finance Symposium, the Barcelona GSE Summer Forum, INSEAD, Frankfurt School of Finance & Management, the CEPR ESSFM in Gerzensee, the EFA Annual Meeting, EIEF, the Wharton Conference on Liquidity and Financial Crises, the AFA Annual Meeting, the Jackson Hole Finance Conference, the NY Fed Conference on OTC Derivatives, National University of Singapore, Paris-Dauphine, Mannheim, the Conference of Swiss Economists Abroad, the Bank of Italy, and Zurich for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
ADRIANO A. RAMPINI & S. VISWANATHAN & GUILLAUME VUILLEMEY, 2020. "Risk Management in Financial Institutions," The Journal of Finance, vol 75(2), pages 591-637. citation courtesy of