| This dissertation examines interest rate risk disclosure and interest rate risk management in bank holding companies (BHCs). In the first essay, I examine the disclosure of interest rate risk in BHCs'10-K filings. I document that interest rate risk disclosures of BHCs from 1997 to 2009 vary cross-sectionally and change over time. While the number of BHCs disclosing maturity gap analysis as an interest rate risk measure declined from 1997 to 2009, there was an increase in interest rate risk simulation disclosures over the same time period. I hypothesize and find that interest rate risk disclosures are related to nontraditional banking activities, time deposit funding, derivative use and institutional investor ownership; the associations are different for large and small BHCs. In my second essay, I evaluate BHCs' management of interest rate risk as related to earnings. I first build an alpha-gap model that is based on alpha - the ratio of changes in rates of rate sensitive liabilities to changes in rates of rate sensitive assets - to explain how interest rate changes affect changes in net interest income. This model decomposes changes in net interest income into rate variances and volume variances, which reflect the outcome of managing interest rate risk and the outcome of changing the size and composition of assets and liabilities, respectively. Next, using a sample of bank holding companies from 1998 to 2010, I document that increases in net interest income are primarily driven by positive volume variances, suggesting that BHCs tend to grow net interest income by changing the size and composition of assets and liabilities and not by effectively managing interest rate risk. In investigating whether interest rate risk management affects the valuation of net interest income, I find that the persistence of net interest income varies positively with interest rate risk management. My study provides new insights into banks' disclosure practices and their management of interest rate risk. The evidence presented in this dissertation can help guide the efforts of the market regulators and accounting standard setter to enhance interest rate risk disclosures of financial institutions, and can help banking regulators monitor interest rate risk. |
