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Financial Institution Risk Management in Samoa: A Study on the Impact of Net Worth on Hedging Policies

A recent study by researchers Adriano A. Rampini, S. Viswanathan, and Guillaume Vuillemey has shed light on the importance of net worth in financial institutions’ risk management strategies. The study, published in The Journal of Finance, found that the net worth of a financial institution plays a significant role in determining its ability to hedge interest and foreign exchange rate risks.

The Study’s Findings

The researchers analyzed data from US bank holding companies between 1995 and 2013, excluding six main derivative dealers. They found that:

  • Institutions with higher net worth are more likely to hedge both types of risks.
  • Those with lower net worth reduce hedging activities.
  • This trend was observed across institutions, as well as within them.

The study also examined the impact of the 2009 housing bubble burst on financial institutions’ hedging policies. The researchers found that:

  • Institutions with higher levels of real estate exposure reduced their hedging activities more significantly than those with less real estate exposure.
  • Institutions most affected by the crisis reduced their hedging activity by approximately one-half.

Implications for Investors and Policymakers

The study’s findings have important implications for investors and policymakers in Samoa. The authors conclude that:

  • Regulatory capital does not drive hedging policy, but rather it is the level of net worth that determines an institution’s ability to hedge risks.
  • Institutions with higher net worth are better equipped to manage their risks through hedging activities, while those with lower net worth may be more vulnerable to fluctuations in market conditions.

The study highlights the importance of monitoring an institution’s net worth and adjusting its risk management strategies accordingly. Policymakers can use this research to develop more effective regulations to promote stability in the financial system.

Conclusion

Overall, the study provides valuable insights into the relationship between net worth and risk management in financial institutions. It highlights the importance of considering an institution’s net worth when evaluating its risk absorption capacity and its potential impact on profitability going forward.