Abstract

OST discussions of the effects of interest rate movements on the portfolios of financial institutions typically conclude that the relatively high and volatile interest rates of the past 15 years have placed many of these institutions in jeopardy of failing. The consensus of many of these discussions is that institutions with “unbalanced ” portfolios and low capital are partic-ularly susceptible to interest rate movements.’ The purpose of this paper is to analyze the effect of interest rate changes on the relative value of financial institutions. ’ This issue is important not only to the owners, managers and employees of financial institu-tions but to monetary policvmakers as well. Monetary policy actions affect interest rates. If the viability of financial institutions is particularly sensitive to interest rate changes, monetary policymakers will want to take this effect into account. 0. J. Santoni is a senior economist at the Federal Reserve Bank