卧的贸易孝 1951 Chapter 4 Managing Interest Rate Risk: Gap and Earnings Sensitivity
Chapter 4 Chapter 4 Managing Interest Rate Managing Interest Rate Risk: Gap and Earnings Gap and Earnings Sensitivity Sensitivity
Asset and liability management The phrase,asset -liability management has generally;however, come to refer to managing interest rate risk ■Interest rate risk ..unexpected changes in interest rates which can significantly alter a bank's profitability and market value of equity. 猫行贺影小号
Asset and liability Asset and liability management management The phrase, asset – liability management has generally; however, come to refer to managing interest rate risk Interest rate risk … unexpected changes in interest rates which can significantly alter a bank’s profitability and market value of equity
Asset and liability management committee A bank's asset and liability management committee (ALCO) coordinates all policy decisions and strategies that determine a bank's risk profit and profit objectives. Interest rate risk management is the primary responsibility of this committee. 麓的贫香小手
Asset and liability Asset and liability management committee management committee A bank's asset and liability management committee (ALCO) coordinates all policy decisions and strategies that determine a bank's risk profit and profit objectives. Interest rate risk management is the primary responsibility of this committee
Net interest income or the market value of stockholders'equity? Banks typically focus on either: net interest income or ■ the market value of stockholders'equity as a target measure of performance. GAP models are commonly associated with net interest income (margin) targeting. Earnings sensitivity analysis or net interest income simulation,or "what if" forecasting 碰制酥价贸易大孝
Net interest income or the market Net interest income or the market value of stockholders' equity? value of stockholders' equity? Banks typically focus on either: net interest income or the market value of stockholders' equity as a target measure of performance. GAP models are commonly associated with net interest income (margin) targeting. Earnings sensitivity analysis or net interest income simulation, or “what if ” forecasting
Interest rate risk 目 Reinvestment rate risk ..the risk that a bank can not reinvest cash flows from assets or refinance rolled over or new liabilities at a certain rate in the future Cost of funds versus the return on assets ▣→Funding GAP,impact on NII ▣Price Risk changes in interest rates will also cause a change in the value (price)of assets and liabilities Longer maturity (duration) ▣→larger change in value for a given change in interest rates Duration GAP,impact on market value of equity 麓行贺影≠考
Interest rate risk Interest rate risk Reinvestment rate risk ... the risk that a bank can not reinvest cash flows from assets or refinance rolled over or new liabilities at a certain rate in the future Cost of funds versus the return on assets ⇒ Funding GAP, impact on NII Price Risk … changes in interest rates will also cause a change in the value (price) of assets and liabilities Longer maturity (duration) ⇒ larger change in value for a given change in interest rates ⇒ Duration GAP, impact on market value of equity
Interest rate risk Example: $10,000 Car loan 4 year Car loan at 8.5% 1 year CD at 4.56 Spread 4.0% But for How long? Funding GAP GAP $RSA-$RSL, where $RSA =amount of assets which will mature or reprice in a give period of time. In this example: GAP1y=$0.00-$10,000=-$10,000 This is a negative GAP. 行贺影小号
Interest rate risk Interest rate risk Example: $10,000 Car loan 4 year Car loan at 8.5% 1 year CD at 4.5% Spread 4.0% But for How long? Funding GAP GAP = $RSA - $RSL, where $RSA = $ amount of assets which will mature or reprice in a give period of time. In this example: GAP1y = $0.00 - $10,000 = - $10,000 This is a negative GAP
Funding GAP ▣ethod Group assets and liabilities into time "buckets"according to when they mature or are expected to re-price Calculate GAP for each time bucket ■ Funding GAP =Value RSA:-Value or RSL where t time bucket;e.g.,0-3 months 的资5+号
Funding GAP Funding GAP Method Group assets and liabilities into time "buckets ” according to when they mature or are expected to re-price Calculate GAP for each time bucket Funding GAP t = $ Value RSA t - $ Value or RSL t where t = time bucket; e.g., 0-3 months
Traditional static GAP analysis 1 Management develops an interest rate forecast 2. Management selects a series of "time buckets"(intervals) for determining when assets and liabilities are rate= sensitive 3. Group assets and liabilities into time "buckets"according to when they mature or re-price The effects of any off-balance sheet positions(swaps, futures,etc.are added to the balance sheet position Calculate GAP for each time bucket Funding GAP =Value RSA:-$Value or RSLt where t time bucket;e.g.,0-3 months 4. Management forecasts NII given the interest rate environment 猫制卧价贸易大孝
Traditional static GAP Traditional static GAP analysis analysis 1. Management develops an interest rate forecast 2. Management selects a series of “time buckets ” (intervals) for determining when assets and liabilities are ratesensitive 3. Group assets and liabilities into time "buckets" according to when they mature or re-price The effects of any off-balance sheet positions (swaps, futures, etc.) are added to the balance sheet position Calculate GAP for each time bucket Funding GAP t = $ Value RSA t - $ Value or RSL t where t = time bucket; e.g., 0-3 months 4. Management forecasts NII given the interest rate environment
Rate sensitive assets and liabilities ▣They include: maturing instruments, ■ floating and variable rate instruments,and ■ any full or partial principal payments. A bank's GAP is defined as the difference between a bank's rate sensitive assets and rate sensitive liabilities. It is a balance sheet figure measured in dollars for U.S.banks over a specific period of time. 制酥所贸易大考
Rate sensitive assets and Rate sensitive assets and liabilities liabilities They include: maturing instruments, floating and variable rate instruments, and any full or partial principal payments. A bank's GAP is defined as the difference between a bank's rate sensitive assets and rate sensitive liabilities. It is a balance sheet figure measured in dollars for U.S. banks over a specific period of time
What determines rate sensitivity? 目 In general,an asset or liability is normally classified as rate-sensitive with a time frame if: 1.It matures 2. It represents and interim,or partial,principal payment 3.The interest rate applied to outstanding principal changes contractually during the interval 4. The outstanding principal can be repriced when some base rate of index changes and management expects the base rate index to change during the interval 碰制酥价贸易大考
What determines rate What determines rate sensitivity? sensitivity? In general, an asset or liability is normally classified as rate-sensitive with a time frame if: 1. It matures 2. It represents and interim, or partial, principal payment 3. The interest rate applied to outstanding principal changes contractually during the interval 4. The outstanding principal can be repriced when some base rate of index changes and management expects the base rate / index to change during the interval
