How do banks and households manage interest rate risk? Evidence from mortgage applications and banks’ responses

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 08 June 2018

Staff Working Paper No. 733
By Christoph Basten, Benjamin Guin and Cathérine Koch

We exploit a unique dataset that features both un-intermediated mortgage requests and independent responses from multiple banks to each request. We show that households typically are not prudent risk managers, but prioritize minimizing current mortgage payments over insurance against future rate increases. Contrary to assumptions in the previous literature, we find that banks do also influence contracted rate fixation periods. They trade off their own exposure to interest rate risk against household requests and against credit risk.

PDFHow do banks and households manage interest rate risk? Evidence from mortgage applications and banks’ responses

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