Hedging of interest rate risk was a less prominent activity for banks when rates were lower. Now, European banks have increased their use of interest rate derivatives in response to shifts in rates and in customer deposit behaviors, partner Andreas Bohn and coauthors explain. In 2023, the traded volume of euro-dominated interest rate derivatives rose 3.4-fold compared with 2020.

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A segmented bar graph shows the notional value of European interest-rate derivatives traded quarterly, in trillions of dollars. The derivatives are overnight indexed swap, forward rate agreements, and fixed-for-floating interest-rate swap. In an era of low rates, 2013–21, hedging of interest-rate risk was a less common activity, averaging <10%. In a more volatile rate environment, from 2022, the potential for losses is much higher, averaging >20%, suggesting banks need more sophisticated, agile, and frequent hedging to respond to shifts in interest rates, credit spreads, and customer deposit behaviors.
Footnote: Includes all terms and all execution venues. Transactions reported by approved publication arrangements, and trading venues located in the EU and UK. The data are displayed with a 5-week delay due to post-trade transparency deferrals.
Source: International Swaps and Derivatives Association.
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To read the article, see “Banking on interest rates: A playbook for the new era of volatility,” June 4, 2024.