Because derivatives are opaque, even if banks have different positions, outside principals may not be able to determine whether the failure of one bank signals trouble at other banks. Since the data are insufficient to calculate interest rate sensitivity, or even market value of the derivative position, interest rate, they make simple assumptions that allow them to go from the data available to estimates of market value and interest rate sensitivity. The authors estimates of interest rate sensitivity show that the banking system has a large net swap position. An increase in interest rates reduces the value of bank swap positions. This sensitivity is due to the positions of large banks.
Small banks tend to have only minor exposure to interest rates in their swap positions.
While these estimates show that large banks have highly interest rate sensitive swap positions, this does not mean that the banks equity positions are interest rate sensitive to the same extent. The banks may use swaps to hedge on-balance sheet interest rate risk or they could use other derivatives markets, such as the futures market, to hedge their swap exposure. The authors found that large banks have mostly hedged swap interest rate risk. The authors suggest that these conclusions may be premature because banks can quickly alter their positions in ways that are hard to monitor. Swaps are opaque so such changes may not be evident to regulators and market participants until it is too late.