Sem título

Página 1

Techniques other than looking at the size of the maturity are used to measure interest rate risk exposure

The repricing model concentrates on the impact of interest rate changes on an FIs net interest income, which is the difference between an FI's interest income and interest expense. It is the central bank's monetary policy strategy that most directly underlies the level and movement of interest rates that in turn affect an Fi's cost of funds and return on assets. While Fed Rserve actions are targeted mostly at short-term rates, changes in short term rates usually feed through to the whole term structure of interest rates

Loanable Funds Theory Changes in interest rates have s significant impact on FIs profitability and net worth. FIs spend a lot of time trying to identify factors that determine interest rates. Interest rates reflect supply and demand for loanable funds. Shifts in supply or demand generate interest rate movements as market forces establishment of new equilibrium

Interest rate volatility exists (and increased from a change in approaches from targeting interest rate goals towards monetary targets) meaning the appropriate measurement of management of interest rate risk is important to every FI

The repricing model is a simple model used by small FIs in the US. This model is essentially a book value accounting cash flow analysis of the repricing gap (difference between assets whose interest rates will be repriced or changed over some future period and liabilities whose interest rates will be repriced or changed over some future period) between the interest income earned on an FIs assets and the interest expense paid on its liabilities over a period of time.

Rate sensitive assets:

Repricing gap: rate sensitive assets- rate sensitive liabilities. Rate sensitivity means that the asset or liability is repriced at or near current market interest rates within a certain time horizon. In the US, Fed Reserve requires US commercial banks to report repricing gaps for assets and liabilities with maturities of 1 day, more than 1 day up to 3 months, more than 3 months up to 6 months, more than 1 year up to 5 years and more than 5 years. Repricing can be the result of a rollover of an asset (e.g. loan is paid off at or prior to maturity and finds are used to issue a new loan at current market rates) OR it can be because the asset or liability is a variable rate instrument (e.g. rate being reset each quarter

Rate sensitive liabilities Are cheque accounts, everyday bill-paying accounts, or transaction accounts RSLs?

Against inclusion: Near-zero rates paid on these accounts do not fluctuate with shore rates, many deposits act as core deposits, linked to online accounts. For inclusion: Might be rate sensitive if rates increase because opportunity cost of holding demand deposit increases so you might shift into savings account or other type of asset leading to runoffs (runoffs in case of interest rate rises resulting in high opportunity cost (of holding demand deposit increases)for the bank (other funding) linked to savings accounts. Also given their funding is from transaction accounts its good to include them

You can say cumulative gap is positive and report it as a fraction of assets because it allows to compare across banks of different size (scale of exposure)

Advantages: Information value, simplicity, transparency

Weaknesses: Market value effects (interest rate changes have a market value effect which the repricing model ignores), over-aggregation (the problem of defining buckets over a range of maturities ignores information regarding the distribution of assets and liabilities within those buckets. For example, dollar values of RSAs and RSLs within any maturity bucket range may be equal. However, on average, liabilities may be repriced toward the end of the bucket's range while assets may be repriced toward the beginning, in which case a change in interest rates will have an effect on asset and liability cash flows that will not be accurately measure by the repricing gap approach. Note that $50 million more RSAs than RSLs are repriced between months 3 and 4 while $50 million more RSLs than RSAs are repriced between months 5 and 6. The FI in its interest rate sensitivity report will show a zero repricing gap for the three month to six month bucket but as you can see, the FIs assets and liabilities are mismatched within the bucket run-offs. We're calculating gaps based on buckets and so we're hiding exposures maturity buckets so a way to get around that is to calculate multiple buckets. The other weakness is it doesn't count for off balance sheet activities. Pricing model assumes interest rates on rate sensitives assets change but the same amount as r on rate sensitive liabilities. The pricing model assumes you get parallel shifts. You get a twist if rates on assets changes by a different amount to rates on liabilities

New Page