Risk Management in Financial Institutions

Based on the excerpt from the paper "Risk Management in Financial Institutions" by Adriano
A. Rampini, S. Viswanathan, and Guillaume Vuillemey, the research problem revolves
around the risk management practices in financial institutions, specifically focusing on the
hedging of interest rate and foreign exchange risk. The data employed in the study is
presumably longitudinal, given the mention of "within institutions over time." The source of
this data is not explicitly stated in the excerpt but is likely obtained from financial reports and
market data for accuracy. The research hypothesis seems to be that institutions with higher
net worth are more likely to engage in hedging activities. The dependent variable in this study
is the extent of hedging, while the independent variable is the net worth of the institution,
alongside other control variables like risk exposures. The research employs a quasi-
experimental design by using "net worth shocks resulting from loan losses" for identification,
thus establishing a causal relationship.

The statistical methods are not detailed in the excerpt, but given the complexity of the
research problem and the need for causal inference, techniques like regression discontinuity
or instrumental variables might be employed. The results, as per the excerpt, show strong
evidence supporting the hypothesis that institutions with higher net worth hedge more, even
after controlling for risk exposures. The conclusion likely underscores the critical role of net
worth in risk management practices, offering valuable insights for policy formulation and
managerial decision-making in financial institutions. This research stands out for its nuanced
approach in exploring the economic reasons behind risk management practices, substantiated
by robust statistical methods and real-world data. Overall, it contributes significantly to the
existing literature by establishing the relationship between net worth and hedging, enriched
by a methodologically sound approach.

Link to the article: https://people.duke.edu/~rampini/papers/financialinstitutions.pdf