Abstract
This dissertation studies U.S. banks’ interest rate risk management, with a focus on how regulation, funding composition, and market conditions jointly shape maturity mismatch and hedging behavior. Across three chapters, I combine empirical evidence, theoretical modeling, and econometric methods to provide new insights into the evolution of risk exposure in the banking sector after the Global Financial Crisis. Chapter 1 uses publicly available data to document the evolution of banks’ maturity mismatch between 1997 and 2019. Before 2008, larger banks systematically carried greater maturity risk, while after 2008 this cross-sectional relationship vanishes, leading to a more homogeneous distribution of maturity profiles across banks. Estimating the effect of interest rate changes on banks’ equity, I show that this convergence also translates into more uniform equity exposure to policy shocks. These findings suggest that the standard Deposit Franchise Theory cannot fully explain observed risk-taking patterns. Complementary econometric evidence highlights correlations between maturity mismatch and equity ratios, funding composition, and interest rate spreads, motivating the need for a new framework. Chapter 2 develops a framework to explain the “Catching Up” phenomenon by embedding stan- dardized, asset-level capital requirements into a mean–variance portfolio model. Using panel IV local projections, I first document a structural break in the equity exposure of non-large banks after 2010, consistent with the implementation of Basel III. This motivates the introduction of capital requirements into the model, which shows that binding constraints reduce heterogeneity in optimal risk-taking and, under certain market conditions, can even increase aggregate exposure despite rising volatility. Finally, I test the model’s predictions with GARCH-based estimates of returns and variances and find that securities and non-mortgage loans uniquely met the conditions for increased exposure during 2008–2015, consistent with the empirical evidence. Chapter 3 decomposes banks’ interest rate risk into balance-sheet maturity mismatch, franchise value (FV) duration, and derivative positions. The main contribution is to show that FV duration is positive for most U.S. banks and increases systematically with bank size, reinforcing rather than offsetting balance-sheet exposures. This implies that large banks are structurally more exposed to interest rate risk through their FV, even though maturity mismatch has become more homogeneous across banks since 2008, as documented in Chapter 1. At the same time, I document that large banks extend duration further through long interest rate swap (IRS) positions, raising the question of why large banks add risk off the balance sheet. As an extension, I propose a bond–IRS substitution channel, in which large banks rely on cheaper bond financing to manage liquidity risk, while smaller banks hedge deposit volatility through swaps.
Committee Chair
Michele Boldrin
Committee Members
Nicolae Gârleanu
Degree
Doctor of Philosophy (PhD)
Author's Department
Economics
Document Type
Dissertation
Date of Award
12-12-2025
Language
English (en)
DOI
https://doi.org/10.7936/6qzp-ma51
Author's ORCID
0000-0002-6849-7979
Recommended Citation
Correa, Marcos, "Essays in Financial Economics and Banking" (2025). Arts & Sciences Theses and Dissertations. 3673.
The definitive version is available at https://doi.org/10.7936/6qzp-ma51