Our estimates are consistent with bank stock prices (they fell strongly when interest rates went up 2022-2023), but not with banks' estimates of their own interest-rate risk exposure (most of them reported in 10Ks in 2021 that a future rise in interest rates would *raise* their equity values).

All taken together, franchise value has positive duration -- it falls when interest rates go up. As a consequence, while banks' holdings of long duration securities may help stabilize net interest margins, they do not hedge franchise value.

Franchise costs, an interest-rate insensitive stream of costs to run the bank, induce negative duration. But we find empirically that banks earn an interest-rate insensitive spread component on the lending side that more than offsets the franchise costs.

Banks earn a spread on deposits, empirically approx. beta x fed funds rate, with beta < 0. As this cash flow floats proportional to the fed funds rate, its duration is zero. When interest rates rise, the cash flow goes up, but the discount rate rise exactly offsets the valuation effect.

I remember… it was soooo good! 😋