Derivative exposure and the interest rate and exchange rate risks of US banks

This article estimates the interest rate and exchange rate risk betas of 59 large U.S. commercial banks for the period of 1975-1992, as well as the bank-specific determinants of these betas. The estimation procedure uses a modified seemingly unrelated simultaneous method that recognizes cross-equation dependencies and adjusts for serial correlation and heteroskedasticity. Overall, the exchange rate risk betas are more significant than the interest rate risk betas. More importantly, we find a link between the scale of a bank's interest rate and currency derivative contracts and the bank's interest rate and exchange rate risks. particularly noteworthy is the influence of currency derivatives on exchange rate betas.