INTEREST RATE HIKE AND THE INSTABILITY IN THE U.S. BANKING INDUSTRY
This paper investigates the effect of interest rate changes on the U.S. banks’ performance captured by unrealized losses, investment securities allocation, and deposit withdrawal. We show that a sudden surge in interest rates could lead to massive losses, potentially erasing the market value of a b...
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| Format: | Article |
| Language: | English |
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Tuwhera Open Access Publisher
2024-12-01
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| Series: | Applied Finance Letters |
| Online Access: | https://ojs.aut.ac.nz/applied-finance-letters/article/view/744 |
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| _version_ | 1846126020248207360 |
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| author | Lai Vo Huong Le |
| author_facet | Lai Vo Huong Le |
| author_sort | Lai Vo |
| collection | DOAJ |
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This paper investigates the effect of interest rate changes on the U.S. banks’ performance captured by unrealized losses, investment securities allocation, and deposit withdrawal. We show that a sudden surge in interest rates could lead to massive losses, potentially erasing the market value of a bank's equity capital. We further show that the U.S. banks have switched more available-for-sale securities to held-to-maturity securities to reduce the realized losses. Moreover, such an increase in interest rates could prompt depositors, particularly those with uninsured deposits, to withdraw their funds. These factors pose significant risks to banks, as evidenced by some recent abrupt failures in the U.S. banking sector.
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| format | Article |
| id | doaj-art-dd47f2d68e2c44ddad983c7f8d279f7a |
| institution | Kabale University |
| issn | 2253-5799 2253-5802 |
| language | English |
| publishDate | 2024-12-01 |
| publisher | Tuwhera Open Access Publisher |
| record_format | Article |
| series | Applied Finance Letters |
| spelling | doaj-art-dd47f2d68e2c44ddad983c7f8d279f7a2024-12-13T06:55:34ZengTuwhera Open Access PublisherApplied Finance Letters2253-57992253-58022024-12-011310.24135/afl.v13i.744INTEREST RATE HIKE AND THE INSTABILITY IN THE U.S. BANKING INDUSTRYLai Vo0Huong LeWestern Connecticut State University This paper investigates the effect of interest rate changes on the U.S. banks’ performance captured by unrealized losses, investment securities allocation, and deposit withdrawal. We show that a sudden surge in interest rates could lead to massive losses, potentially erasing the market value of a bank's equity capital. We further show that the U.S. banks have switched more available-for-sale securities to held-to-maturity securities to reduce the realized losses. Moreover, such an increase in interest rates could prompt depositors, particularly those with uninsured deposits, to withdraw their funds. These factors pose significant risks to banks, as evidenced by some recent abrupt failures in the U.S. banking sector. https://ojs.aut.ac.nz/applied-finance-letters/article/view/744 |
| spellingShingle | Lai Vo Huong Le INTEREST RATE HIKE AND THE INSTABILITY IN THE U.S. BANKING INDUSTRY Applied Finance Letters |
| title | INTEREST RATE HIKE AND THE INSTABILITY IN THE U.S. BANKING INDUSTRY |
| title_full | INTEREST RATE HIKE AND THE INSTABILITY IN THE U.S. BANKING INDUSTRY |
| title_fullStr | INTEREST RATE HIKE AND THE INSTABILITY IN THE U.S. BANKING INDUSTRY |
| title_full_unstemmed | INTEREST RATE HIKE AND THE INSTABILITY IN THE U.S. BANKING INDUSTRY |
| title_short | INTEREST RATE HIKE AND THE INSTABILITY IN THE U.S. BANKING INDUSTRY |
| title_sort | interest rate hike and the instability in the u s banking industry |
| url | https://ojs.aut.ac.nz/applied-finance-letters/article/view/744 |
| work_keys_str_mv | AT laivo interestratehikeandtheinstabilityintheusbankingindustry AT huongle interestratehikeandtheinstabilityintheusbankingindustry |