Discus the view that interest rate risk management has been the most crucial in the risk management portfolio of commercial banks over the years.
Discus the view that interest rate risk management has been the most crucial in the risk management portfolio of commercial banks over the years.
Interest rate risk is the risk of changing market rates which would affect the income and expenses of the bank. Banks deal mostly in deposits and loans and any changes in interest rate would affect their net interest income (NII). This eventually would have an impact on their net worth since the assets, liabilities and other off-balance sheet items get adversely affected by these market rate changes.
Loans to other individuals and corporates are their assets whereas deposits in the bank are their liabilities, as interest is to be paid on the same. When the bank is more asset sensitive, then a decrease in short term interest rate would reduce the net worth of the banks whereas for a bank which is liability sensitive, an upsurge in short term rate would reduce their net worth.
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