Basis risk and net interest income of banks

Piotr Mielus , Tomasz Mironczuk , Anna Zamojska

Abstract

The results of the banking sector are shaped primarily by commissions and net interest income. Net interest income is determined by the difference between the profitability of bank assets and liabilities. In the case when a different method is used to determine interest for each side of the balance sheet, there occurs a basis risk that may lead to the deterioration in the net interest income of the sector. This is the situation in the Polish banking sector, which is characterized by the presence of variable interest rates for long-term assets and fixed interest rates for short-term liabilities. The study aims to verify the following thesis: in an environment of falling interest rates we can observe the deterioration in net interest income of the banking sector, as a result of the materialization of the basis risk. The authors of the article state that the source of the basis risk is the mismatch between the reference rate used to define the interest flow of loans and the actual cost of financing the balance through term deposits collected from non-financial entities.
Author Piotr Mielus
Piotr Mielus,,
-
, Tomasz Mironczuk
Tomasz Mironczuk,,
-
, Anna Zamojska KE
Anna Zamojska,,
- Department of Econometrics
Journal seriesFolia Oeconomica Stetinensia, ISSN 1730-4237, e-ISSN 1898-0198
Issue year2016
Vol16
No2
Pages40-59
Publication size in sheets0.95
Keywords in Englishnet interest income of the bank, cost of financing, interest rates on deposits, financial market indices
DOIDOI:10.1515/foli-2016-0024
URL https://doi.org/10.1515/foli-2016-0024
Languageen angielski
LicenseJournal (articles only); published final; Uznanie Autorstwa - Użycie Niekomercyjne - Bez utworów zależnych (CC-BY-NC-ND); with publication
Score (nominal)11
ScoreMinisterial score = 11.0, 13-12-2017, ArticleFromJournal
Ministerial score (2013-2016) = 11.0, 13-12-2017, ArticleFromJournal
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