Title: Which interest rate scenario is the worst one for a bank? Evidence from a tracking bank approach for German savings and cooperative banks

Authors: Christoph Memmel

Addresses: Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, D-60431 Frankfurt, Germany

Abstract: Interest income is the most important source of revenue for most banks. The aim of this paper is to assess the impact of different interest rate scenarios on the banks| interest income. As we do not know the interest rate sensitivity of real banks, we construct for each bank a portfolio with a similar composition of its assets and liabilities, called |tracking bank|. We evaluate the effect of 260 historical interest rate shocks on the tracking banks of German savings and cooperative banks. It turns out that a sharp decrease in the steepness of the yield curve has the most negative impact on the banks| interest income.

Keywords: interest rate risks; stress testing; Germany; banks; bank interest income; yield curve.

DOI: 10.1504/IJBAAF.2008.020243

International Journal of Banking, Accounting and Finance, 2008 Vol.1 No.1, pp.85 - 104

Published online: 09 Sep 2008 *

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