Repricing about InterestRateRisk
Managing Interest Rate Risk
Interest Rate Risk
The potential loss from unexpected changes in interest rates which can significantly alter a bank’s profitability and market value of equity.
When a bank’s assets and liabilities do not reprice at the same time, the result is a change in net interest income.
The change in the value of assets and the change in the value of liabilities will also differ, causing a change in the value of stockholder’s equity
Banks typically focus on either:
Net interest income or
The market value of stockholders' equity
Asset and Liability Management Committee (ALCO)
The ALCO’s primary responsibility is interest rate risk management.
The ALCO coordinates the bank’s strategies to achieve the optimal risk/reward trade-off.
Repricing Model
Rate sensitivity means time to repricing
Rate-sensitive assets: those assets that will mature or reprice in a given time period
Rate-sensitive liabilities: those liabilities that will mature or reprice in a given time period
Example
Which of the following assets or liabilities fit the one-year rate or repricing sensitivity test? (1) 91-day U.S. Treasury bills (2) 1-year U.S. Treasury notes (3) 20-year U.S. Treasury bonds (4) 20-year floating-rate corporate bonds with annual repricing (5) 30-year floating-rate mortgages with repricing every two years (6) 30-year floating-rate mortgages with repricing every six months (7) Overnight fed funds (8) 9-month fixed rate CDs (9) 1-year fixed-rate CDs (10) 5-year floating-rate CDs with annual repricing (11) Common stock
Repricing gap is the difference between the rate sensitivity of each asset and the rate sensitivity of each liability: RSA – RSL
Measuring Interest Rate Risk with GAP
Example:
A bank makes a $10,000 four-year car loan to a customer at fixed rate of 8.5%. The bank initially funds the car loan with a one-year $10,000 CD at a cost of 4.5%. The bank’s initial
Interest Rate Risk
The potential loss from unexpected changes in interest rates which can significantly alter a bank’s profitability and market value of equity.
When a bank’s assets and liabilities do not reprice at the same time, the result is a change in net interest income.
The change in the value of assets and the change in the value of liabilities will also differ, causing a change in the value of stockholder’s equity
Banks typically focus on either:
Net interest income or
The market value of stockholders' equity
Asset and Liability Management Committee (ALCO)
The ALCO’s primary responsibility is interest rate risk management.
The ALCO coordinates the bank’s strategies to achieve the optimal risk/reward trade-off.
Repricing Model
Rate sensitivity means time to repricing
Rate-sensitive assets: those assets that will mature or reprice in a given time period
Rate-sensitive liabilities: those liabilities that will mature or reprice in a given time period
Example
Which of the following assets or liabilities fit the one-year rate or repricing sensitivity test? (1) 91-day U.S. Treasury bills (2) 1-year U.S. Treasury notes (3) 20-year U.S. Treasury bonds (4) 20-year floating-rate corporate bonds with annual repricing (5) 30-year floating-rate mortgages with repricing every two years (6) 30-year floating-rate mortgages with repricing every six months (7) Overnight fed funds (8) 9-month fixed rate CDs (9) 1-year fixed-rate CDs (10) 5-year floating-rate CDs with annual repricing (11) Common stock
Repricing gap is the difference between the rate sensitivity of each asset and the rate sensitivity of each liability: RSA – RSL
Measuring Interest Rate Risk with GAP
Example:
A bank makes a $10,000 four-year car loan to a customer at fixed rate of 8.5%. The bank initially funds the car loan with a one-year $10,000 CD at a cost of 4.5%. The bank’s initial