Interest Rate Risk

3594 WordsFeb 24, 201215 Pages
Interest Rate Risk (IRR) Management What is Interest Rate Risk : Interest rate risk is the risk where changes in market interest rates might adversely affect a bank’s financial condition. The management of Interest Rate Risk should be one of the critical components of market risk management in banks. The regulatory restrictions in the past had greatly reduced many of the risks in the banking system. Deregulation of interest rates has, however, exposed them to the adverse impacts of interest rate risk. What is the Impact of IRR: The immediate impact of changes in interest rates is on the Net Interest Income (NII). A long term impact of changing interest rates is on the bank’s networth since the economic value of a bank’s assets,…show more content…
These policies should be applied on a consolidated basis and, as appropriate, at the level of individual affiliates, especially when recognising legal distinctions and possible obstacles to cash movements among affiliates. Principle 5: It is important that banks identify the risks inherent in new products and activities and ensure these are subject to adequate procedures and controls before being introduced or undertaken. Major hedging or risk management initiatives should be approved in advance by the board or its appropriate delegated committee. Risk measurement, monitoring and control functions Principle 6: It is essential that banks have interest rate risk measurement systems that capture all material sources of interest rate risk and that assess the effect of interest rate changes in ways that are consistent with the scope of their activities. The assumptions underlying the system should be clearly understood by risk managers and bank management. Principle 7: Banks must establish and enforce operating limits and other practices that maintain exposures within levels consistent with their internal policies. Principle 8: Banks should measure their vulnerability to loss under stressful market conditions - including the breakdown of key assumptions - and consider those results when establishing and reviewing their policies and limits for interest rate risk. Principle 9: Banks must have
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