The Impact of Interest Rate Fluctuations on Commercial Banks and Their Risk Mitigation Strategies

Abstract

This thesis investigates the heterogeneous effects of interest rate fluctuations on commercial banks and assesses the effectiveness of their risk mitigation strategies, with a focus on the 2022–2023 U.S. Federal Reserve rate hike cycle (0.25% to 5.5%) as a critical empirical context. By integrating theoretical frameworks, quantitative data analysis, and comparative case studies, it examines how large international banks and small/regional banks differ in their exposure to rate risk and risk management practices. Key findings include: 1) Interest rate hikes enhance net interest income (NII) for large banks with positive repricing gaps (e.g., JPMorgan Chase’s 40% year-over-year NII growth in 2022) but cause severe deposit outflows and unrealized bond losses for small banks; 2) Asset-Liability Management (ALM) and financial derivatives are core mitigation tools, yet small banks lack access to derivatives (only 15% of U.S. small banks use interest rate swaps, compared to 75% of large banks); 3) Failures like Silicon Valley Bank (SVB) result from neglected duration risk and over-reliance on uninsured deposits. The study concludes with targeted recommendations for banks (e.g., small banks adopting cloud-based ALM tools) and regulators (e.g., size-specific stress testing) to strengthen financial resilience amid rate volatility.