Bank exposures to interest-rate risk: the case of the Australian banking industry

Abstract

This paper provides evidence of the changing nature of interest-rate sensitivity of a banking and finance portfolio in Australia over the period 1978–1992. Specifically, the potential sensitivity to short- and long-term interest rate movements is examined in each of three subperiods (1978–1982, 1983–1987 and 1988–1992). Consistent with previous US evidence, our major finding is that the banking portfolio exhibits sensitivity only to long-term interest rates. However, this sensitivity is significant only during the middle subperiod – a time when Australian financial markets experienced dramatic deregulatory changes including the floating of the domestic currency.