Clarke, Ruth ; Logan, Twila-Mae ; Alexander-Smith, Dorothy
Author Affiliation, Ana.
Department of Management Studies
Interest rate volatility effects on profitability and solvency: A study of the Jamaican financial sector
Social and Economic Studies
Date of Publication
This paper examines the role interest rate risk played in the performance of financial institutions during a period of financial crisis in the Jamaican economy in the late 1990s. The economic environment during this period was characterized by highly volatile interest rates, liberalization of the foreign exchange market and deregulation in the banking sector. We examine the changes in net interest margin and the market value of equity of the commercial banks. We find that changes in net interest margin and changes in market interest rates. These results partially explain the severe profitability and solvency problems that the commercial banks experienced in the late 1990s, after the government drastically reduced market interest rates. We also find that bank management moved to alleviate pressure on solvency by adjusting the asset and liability mix but was not able to effect a significantly positive outcome for bank pofitability and solvency.....