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African Journal of Finance and Management

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Interest Rate Rish of Australian Financial Sector Companies in a Period of Regulatory Change.

RW Faff, PF Howard

Abstract


In a recent study, Madura and Zarruk (1995) provide evidence that interest rate risk is greater for non-US banks (British, Canadian, German and Japan) than for US Banks. The primary contribution of this paper is to extend the Madura and Zarruk analysis to the financial institutions of Australia over a period of extreme regulatory change, namely, 1978 to 1992. The full sample period is partitioned into three subperiods of analysis, namely, January 1978 to November 1983 ("pre-deregulation" period): February l984 to September 1987 ("deregulation" period); and November 1987 to December 1992 ("post-deregulation" period) and the potential sensitivity to short, medium and long-term interest rate movements is examined in each sub-period. Our major findings are that (1) while there is some general evidence of interest rate sensitivity in the first two sub-periods, no such evidence is forthcoming in the final sub-period. (2) while the evidence of sensitivity at the long-term end is relatively strong, the short-term results are far less convincing; (3) there seems to be some degree of instability of interest rate sensitivity across sub-periods, particularly for long-term rates; (4) while significant interest rate sensitivity of a large banks portfolio and a finance companies portfolio is found, no such evidence is apparent in any subperiod for a small banks portfolio; and (5) there is a negligible role for a "shape of the term structure" effect.

African Journal of Finance and Management Vol.7(2) 1999: 34-58



http://dx.doi.org/10.4314/ajfm.v7i2.24348
AJOL African Journals Online