slike bài giảng quản trị ngân hàng chương 8 risk management for changing interest rates

William Chittenden edited and updated the PowerPoint slides for this edition. RISK MANAGEMENT FOR CHANGING INTEREST RATE: ASSET-LIABILITY MANAGEMENT DURATION Chapter 8 Key topics 1. Asset, Liability, and Funds management 2. Market rates and interest-rate risk 3. The goals of interest-rate hedging 4. Interest-sensitive gap management 5. Duration gap management 6. Limitations of hedging techniques 7-2 Asset-Liability Management The purpose of Asset-Liability management is to control a bank’s sensitivity to changes in market interest rates and limit its losses in its net income or equity. 7-3 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. Historical view of asset-liability management  Asset management strategy (control over assets, no control over liabilities)  Liability management strategy (control over liabilities by changing rates and other terms)  Funds management strategy (work with both strategies) 7-5 Interest rate risk: one of the main challenges  Forces determining interest rates  Loanable funds theory  The measurement of interest rates  YTM  Bank discount  Components of interest rates 7-6 Yield to maturity (YTM) ∑ = + = n 1t t t YTM) (1 CF PriceMarket 7-7 Bank discount rate (DR) Maturity toDays # 360 * FV Price Purchase- FV DR = Where: FV equals Face Value of a Security, such as Treasury Bills 7-8 Market interest rates Function of:  Risk-free real rate of interest  Various risk premiums  Default risk  Inflation risk  Liquidity risk  Call risk  Maturity risk 7-9 Yield curves  Graphical picture of relationship between yields and maturities on securities  Generally created with treasury securities to keep default risk constant  Shape of the yield curve  Upward – long-term rates higher than short- term rates  Downward – short-term rates higher than long- term rates  Horizontal – short-term and long-term rates the same  Shape of the yield curve and a maturity gap 7-10 [...]... changes in interest rates which can significantly alter a bank’s profitability and market value of equity 7-15 Interest rate risk  Reinvestment risk  When interest rates fall, the coupon payments on the bond are reinvested at lower rates  Price risk  When interest rates rise, the market value of the bond or asset falls Interest rate risk: Re-investment rate (spread) risk  If interest rates change,...7-11 Net interest margin Interest Income - Interest Expenses NIM = Total Earnings Assets 7-12 Goal of interest rate hedging One important goal of interest rate hedging is to insulate the bank from the damaging effects of fluctuating interest rates on profits 7-13 Quick quiz 1 What forces cause interest rates to change? 2 What makes it so difficult to correctly forecast interest rate changes?... assets or refinance rolled-over liabilities at a different interest rate in the future  An increase in rates, ceteris paribus, increases a bank’s interest income but also increases the bank’s interest expense  Static GAP Analysis considers the impact of changing rates on the bank’s net interest income Interest rate risk: Price risk  If interest rates change, the market values of assets and liabilities... posted interest revenues of $63 million and interest costs from all of its borrowings of $42 million If this bank possesses $700 million in total earning assets, what is First National’s net interest margin? Suppose the bank’s interest revenues and interest costs double, while its earning assets increase by 50% What will happen to its net interest margin? Interest rate risk  Interest rate risk  The... in value for a given change in interest rates  Duration GAP considers the impact of changing rates on the market value of equity 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 spread is 4%  What is the bank’s risk? What... interest income and expense based on the type of change 7-32 Interest- sensitive gap masurements Interest- Sensitive Assets – Dollar InterestSensitive Gap = Interest Sensitive Liabilities Relative InterestSensitive Gap Interest Sensitivity Ratio Dollar IS Gap = Bank Size Interest Sensitive Assets = Interest Sensitive Liabilities Changes in Net Interest Income are directly proportional to the size of the... liabilities into these “buckets ”  Calculate the GAP for each “bucket ”  Forecast the change in net interest income given an assumed change in interest rates 7-35 Computer-based techniques and maturity buckets 7-36 Asset-sensitive bank has:  Positive dollar interest- sensitive gap  Positive relative interest- sensitive gap  Interest sensitivity ratio greater than one ... parallel  If rates do not change by the same amount and at the same time, then net interest income may change by more or less Traditional static GAP analysis Steps in GAP analysis  Develop an interest rate forecast  Select a series of “time buckets” or intervals for determining when assets and liabilities will re-price  Group assets and liabilities into these “buckets ”  Calculate the GAP for each... and/or inverts Changes in the volume of earning assets and interest- bearing liabilities  Net interest income varies directly with changes in the volume of earning assets and interest- bearing liabilities, regardless of the level of interest rates Proportionate doubling in size NII and GAP double, but NIM stays the same What has happened to risk? RSAs increase to $540 while fixed-rate assets decrease... Examples of re-priceable (interest sensitive) Assets and Liabilities 7-21 Factors affecting net interest income (NII)  Changes in the level of interest rates  Changes in the spread between assets and liabilities  Changes in the rate sensitive gap (= RSA – RSL), caused by  Changes in the composition of assets and liabilities  Changes in the volume of earning assets and interest- bearing liabilities . slides for this edition. RISK MANAGEMENT FOR CHANGING INTEREST RATE: ASSET-LIABILITY MANAGEMENT DURATION Chapter 8 Key topics 1. Asset, Liability, and Funds management 2. Market rates and interest- rate. Treasury Bills 7 -8 Market interest rates Function of:  Risk- free real rate of interest  Various risk premiums  Default risk  Inflation risk  Liquidity risk  Call risk  Maturity risk 7-9 Yield. reinvested at lower rates  Price risk  When interest rates rise, the market value of the bond or asset falls 7-15 Interest rate risk: Re-investment rate (spread) risk  If interest rates change,