Banking and the Management of Financial Institutions - Managing Interest-Rate Risk

4 important questions on Banking and the Management of Financial Institutions - Managing Interest-Rate Risk

What happens when a bank has more rate-sensitive liabilities than assets?

A rise in interest rates will reduce the bank’s profits, and a decline in interest rates will raise the bank’s profits

What is the formula of basic gap analysis?

(rate sensitive assets - rate sensitive liabilities) * difference in  interest rates = difference in bank profit

How to you refine the basic gap analysis?

by:
• Maturity bucked approach:
Measures the gap for several maturity subintervals (buckets) to calculate the effects of interest-rate changes can be calculated over a multiyear period
• Standardised gap analysis:
Accounts for different degrees of rate sensitivity among rate-sensitive assets and liabilities.
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What is the duration analysis?

It examines the sensitivity of the market value of the bank’s total assets and liabilities to changes in the interest rates.

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