Interest rates and bank portfolio adjustments

We test empirically to determine if the relation between banks' portfolio of assets and liabilities and interest rate is stable. Several possible causes of instability are considered. The econometric techniques employed allow for continuous change in the structure of the empirical model. In all cases, stability of the model is strongly rejected. We find that the portfolio-interest rate relationship depends on the level of interest rates and exogenous assets, as well as their rate and direction of change.