Generally, the net interest income of regional banks decreases with a fast interest rate rise. Our analyses in the below study show however that this is not the case anymore in the current negative interest rate environment in Switzerland. Simulations demonstrate that the periodic net interest income of the financial institutions does not decrease even with an immediate interest rate rise, but that on the contrary, it is significantly higher, at least until a reasonable margin can be achieved on the customer deposits. The reason for this is the compensating effect between the maturity transformation result and the net interest spread, which—according to various simulations—is almost one to one in the current negative interest rate environment.
Banks should take this effect into consideration when choosing their interest rate risk strategy. The analysis for a simple sample bank shows that with various scenarios of increasing interest rates a positive interest rate transformation leads to a higher and more stable periodical net interest income on average than a completely secured interest rate risk strategy.
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