Journal Article
Are Banks Exposed to Interest Rate Risk?
Zhu, Simon; Paul, Pascal (2020-06-22)
While banks seem to face inherent risk from short-term interest rate changes, in practice they structure their balance sheets to avoid exposure to such risk. Nonetheless, recent research finds that banks cannot offload all of the interest rate risk they are naturally exposed to. Historically, banks’ profit margins reflect their compensation for taking on interest rate risk and their stock prices are highly sensitive to changes in interest rates. These findings can help practitioners assess banks’ risk exposures and may have implications for unconventional monetary policy.
FRBSF Economic Letter , Volume 2020 , Issue 16 , Pages 05

Journal Article
When the Fed Raises Rates, Are Banks Less Profitable?
Paul, Pascal (2022-12-20)
Banks limit their interest rate risk exposure by issuing adjustable-rate loans and protect their funding costs by slowly adjusting deposit rates. These actions allow banks to maintain largely stable profit margins even if monetary policy tightens unexpectedly. Evidence from the pre-pandemic tightening cycle suggests that bank profit margins could increase rather than decline over the coming months. However, the slow adjustment of rates that banks pay on deposits may result in people moving their savings, leading to a reallocation of assets away from the regulated banking system.
FRBSF Economic Letter , Volume 2022 , Issue 35 , Pages 06