10 L. Ballester, R. Ferrer, and C. Gonz ́alez
long-term rates being the ones which exert greater influence. This negative relation-
ship has been mostly attributed to the typical maturity mismatch between banks’
assets and liabilities. Another explanation is closely linked to the expansion phase
of the Spanish economy since the mid-1990s. Specifically, bank profits did increase
dramatically, reaching their greatest figures ever, with the subsequent positive effect
on stock prices, in a context of historically low interest rates within the framework
of the Spanish housing boom. Further, interest rate volatility is also found to be a
significant determinant of bank portfolio return volatility, with a negative effect.
Another major result refers to the direct relationship found between bank size and
interest rate sensitivity. This size-based divergence could be the result of differences
between large and small banks in terms of bank pricing policy, extent of use of
derivative instruments or product and client specialisation. Thus, larger banks have
a stock performance basically driven by market conditions, whereas smaller banks
are influenced more heavily by idiosyncratic risk factors. Finally, a decline of bank
interest rate sensitivity during recent years has been documented, which may be linked
to the greater availability of systems and instruments to manage and hedge interest
rate risk.
Acknowledgement.The authors are grateful for the financial support from the Spanish Ministry
of Education and Science and FEDER Funds, grant number SEJ2005-08931-C02-02/ECON.
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