German banks manage interest and credit risks to protect against economic shocks.
The article examines how German banks manage interest and credit risks. They found that banks adjust their risk exposure to interest rate changes, allocate risk budgets between interest and credit risks, and are rewarded for taking on these risks. When interest rates rise, banks' bond portfolios suffer more losses than their interest income, but they offset this by using hidden reserves. Banks using interest derivatives have lower losses in their bond portfolios.