Modeling Variation in U.S. Bank Holding Companies’ Net Interest Margins
By Daniel Dorchuck
This study explores variation in US bank holding companies’ (BHCs) net inter-est margins (NIMs) and the effects of interest rate risk exposure on NIMs. Interest rate risk (IRR) is intrinsic in maturity transformation and financial intermediation as banks take on short-term liabilities in the form of deposits and create assets in the form of loans with longer maturities and different repricing profiles. Accordingly, interest rate risk is necessary for bank holding companies (BHCs) to be profitable in financial intermediation, and net interest margins are chosen as a variable of inter-est because they are an isolated measure of bank’ profitability from interest earning assets. Naturally, BHCs employ maturity pairing and derivative hedging to mitigate IRR and ultimately increase and smooth earnings. Synthesizing banks’ balance sheet and income statement data, macroeconomic variables, credit conditions, and interest rate environment variables, this study hopes to expand on existing work by provid-ing insight on the determinants of NIMs as well as interest rate derivatives’ efficacy in increasing and stabilizing net interest margins. The models presented establish links between long term rate exposure, risk-averse capital positions, and increased margins. Additionally, the models suggest that banks earn smaller spreads (NIMs) in higher interest rate environments but benefit from steeper yield curves.
Advisor: Mary Beth Fisher, Kent Kimbrough | JEL Codes: E44, G20, G21 Tagged: Depository Institutions, Interest Rate Derivatives, Interest Rate Risk, Net Interest Margins, US Commercial Banking
Proposing an Alternative to the European Central Bank’s Fiscal Convergence Criteria
By Junaid Arefeen
The recent onset of the sovereign debt crisis in the Eurozone has brought the viabil-ity of the Eurozone as a currency area into question. The unsustainable debt and deficit balances accumulated by several Eurozone nations since the adoption of the common currency in 1999, and the consequent incidence of high levels of sovereign default risk in the euro-area, indicate that the fiscal convergence criteria employed by the European Central Bank to monitor the fiscal discipline and sustainability of its members have been largely ine↵ectual. This paper draws upon the theory of optimum currency areas, and proposes a set of business cycle convergence criteria that can be employed as an alternate means to minimize the risk of fiscal imbalances and sovereign default. Economic theory suggests that a currency union with convergent business cycles will be insulated from asymmetric shocks, removing the need for countries to rely wholly on their fiscal policies when dealing with negative shocks (as would be the case in a currency union with non-synchronous countries su↵ering from negative asymmetric shocks). Therefore, as the risk of fiscal imbalances is minimized, a currency union with synchronous business cycles is expected to have low incidences of sovereign default risk. This paper tests this economic intuition empirically, and employs a multivariable panel regression model to determine the relationship between business cycle convergence and sovereign default risk (proxied using sovereign yield spreads). The regressions reveal that the degree of business cycle convergence is one of the main determinants of yield di↵erentials, and the relationship between the two is negative (as expected). The consistency of the results to numerous robustness checks provide a strong case for substituting the current fiscal convergence criteria with measures that assess the degree of business cycle convergence.
Advisor: Andrea Lanteri, Cosmin Ilut | JEL Codes: E32, E43, F34, F44, F45 | Tagged: Cycle Convergence, Optimum Currency Area, Sovereign Default Risk
Understanding the Argentine Peso’s Devaluation in 2014 —Analysis on Argentina’s Fiscal Sustainability from 1993 to 2013
By Feng Pan
This research analyzes the fiscal sustainability of Argentina from 1993 to 2013. Specifically, it explains the peso devaluation in early 2014 and suggests that it is primarily due to the fundamental problems in Argentina’s economy. This paper highlights Argentina’s inability to enhance its fiscal conditions and suggests possible future economic developments in Argentina. This paper concludes that there is high
chance of hyperinflation, debt default, and the eventual dissolution of the managed exchange rate regime in Argentina in the future.
Advisor: Alison Hagy, Craig Burnside | JEL Codes: E43, E44, E52, E58, E62, F31 | Tagged: Argentine Peso, Exchange Rate, Fiscal Sustainability
