European Business Schools Librarian's Group
HEC Research Papers Series,
HEC Paris
No 1657: Hedge Accounting and Banks' Interest Rate Risk Management
Waqar Ali, Sanjeev Bhojraj, Yao Lu and Shuyan Wang
Additional contact information
Waqar Ali: HEC Paris - Accounting and Management Control Department
Sanjeev Bhojraj: Cornell University - Samuel Curtis Johnson Graduate School of Management
Yao Lu: Cornell University - Samuel Curtis Johnson Graduate School of Management
Shuyan Wang: University of Minnesota - Twin Cities, Carlson School of Management
Abstract: We study how relaxing hedge accounting requirements under ASU 2017-12 affects banks' interest rate risk management. Banks significantly increase their use of hedge-accounted interest rate derivatives following the standard change. The standard change increases banks' holdings of longer-term loans, widening their asset-liability duration gap. Meanwhile, it leads to inflows of uninsured deposits and lower sensitivity of interest expense to changes in market rates, indicating a strengthened "deposit franchise." In exploring the motives behind banks' responses, we find that adopting ASU 2017-12 does not further reduce banks' already low interest rate risk exposure. Instead, it increases banks' interest income, while helping financially weaker banks better manage liquidity risk. Overall, our findings suggest that banks leverage ASU 2017-12 as an opportunity to undertake a broad, coordinated adjustment to their asset allocation and risk management strategies.
Keywords: Bank; Interest Rate Risk; Derivatives; Hedge Accounting; ASU 2017-12; Asset Allocation; Deposit Franchise
57 pages, September 1, 2026
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