ONLINE ASSESSMENT OF INTEREST RATE RISK

In addition to being of great importance to bank managers (due to the particular significance of Interest Rate to banking institutions: its fluctuation is, at the same time, a premise for success AND potentially fatal in case of inadequate management), Interest Rate Risk is of concern to any individual who possesses a financial portfolio (made up of loans, deposits, various investments, etc.), as any such portfolio may be endangered when exposed to fickle Interest Rates. Members of this latter category, however, are grossly neglected when it comes to availability of both information about and affordable or, better yet, free methods of protection against Interest Rate Risk. Approaches to Interest-Rate-Risk assessment, from the traditional, time-honored methods (maturity and repricing schedules) to the more complex and experimental ones, are at least partially suited for software implementation. Using the Internet as medium, fairly simple, yet effective methods of Interest-Rate-Risk assessment can be made available to a vast audience, including current and potential bank employees involved in risk management, individuals whose interest in the matter is academic or, quite simply, members of the general public aware of the implications of Interest-Rate variation upon their financial investments.Computerized Risk Management, Banking Risk, Interest Rate Risk, Gap Analysis, Duration Gap Analysis

Interest rate pass-through and risk

One of the most striking features of the financial crisis that began in the autumn of 2007 has been the associated upheaval in conventional interest rate spreads. In the UK, this is most frequently symbolised by the widening (and increased volatility) of the spread between 3-month Libor and the Bank of England’s policy rate. This paper uses a vector error correction model to look at the way in which the recent crisis has affected a wide range of interest rate spreads. We look for changes in the coefficient on the policy rate (the ‘pass-through’) and at changes in the speed of adjustment to changes in the policy rate, since both are important for policy. We find, as others have done, that the conventional behaviour of almost all spreads is swept away after August 2007. By developing a model which incorporates measures of counterparty and liquidity risk, we show that market rates are now subject to additional influences, but except for secured loans, still incorporate the effects of changes in the policy rate much as they did before the crisis. This contrasts with the widely-held view that the relationship between policy and money market rates in particular has been severely disrupted by the crisis. For secured loans, however, there is evidence that the mark-up has risen while at the same time the policy pass-through has fallen since August 2007. The same applies to deposit rates, albeit to a lesser extent, with the result that the sharp reduction in policy rate since the end of 2007 has had a larger effect on deposit than loan rates.intrest rates; risk; VAR; Financial crisis

Pricing Interest-Rate Risk for Mortgage REITs

Using tax-qualified mortgage REITs over three periods (1976-79, 1980-82, and 1983-90), this paper investigates the pricing of interest-rate risk for mortgage REITs at equilibrium. A system of nonlinear equations is estimated to determine the monthly interest-rate risk premium over each of the three time intervals. There is evidence to support the hypothesis that interest-rate risk is not diversifiable and hence commands a risk premium.

Interest rate risk at U.S. commercial banks

Risk ; Interest rates ; Banks and banking ; Banks and banking - West ; Federal Reserve District, 12th

Evaluating the Interest-Rate Risk of Adjustable-Rate Mortgage Loans

This paper evaluates the interest-rate risk inherent in an adjustable-rate mortgage (ARM) with sporadic rate adjustments and possibly binding periodic and life-of-loan rate change constraints. Simulation analysis forecasts ARM cash flows, determines the probability that constraints will hold, and partitions the loan into fixed and variable components. Simulation parameters are then altered to measure the impact of changes in contract terms and market conditions on the interest-rate risk of a typical ARM loan. Interest-rate sensitivity is found to be significantly less than that of fixed-rate loans and remarkably insensitive to changes in loan margins or initial loan rates after the first few years of an ARM's life. Therefore, it is not surprising that lenders have used these features to lure borrowers to ARMs. Periodic rate change limits and volatility in the underlying index are the only factors that influence the interest-rate risk of an existing ARM in a substantive way.

SHADOW RISK-FREE RETURNS WHEN HEDGING THE INTEREST RATE RISK

This paper addresses the hedging of bond portfolios interest rate risk by drawing on the classical one period no-arbitrage approach of Financial Economics (Ingersoll (1987)). Under quite weak assumptions on the interest rate behavior several shadow riskless assets are introduced by means of semi-infinite mathematical programming problems. Then, these assets are interpreted as hedging strategies or, under adequate hypotheses, as immunized portfolios. The technique applies in a quite broad range of cases since, for instance, short-selling or convexity restrictions are not necessarily required and the uniqueness of the horizon planning period does not have to be imposed. The set of admissible shocks on the interest rate contains a vast number of possibilities, the solutions are robust and do not significantly depend on the random field framework affecting the interest rate, and under some conditions, derivative securities may be also included in the analysis. Furthermore, appropriate algorithms are developed in a very general mathematical setting. Finally, a few examples illustrate the way they work in practice along with the general form of the hedging portfolio.

Interest-rate risk in the Indian banking system

Many observers have expressed concerns about the impact of a rise in interest rates upon banks in India. In this paper, we measure the interest rate risk of a sample of major banks in India, using two methodologies. The first consists of estimating the impact upon equity capital of certain interest rate shocks. The second consists of measuring the elasticity of bank stock prices to fluctuations in interest rates. We find that as of 31 March 2002, many major banks had economically significant exposures. Using the first approach, we find that roughly two-thirds of the banks in the sample stood to gain or lose over 25% of equity capital in the event of a 320 bps move in interest rates. Using the second approach, we find that the stock prices of roughly one-third of the banks in the sample had significant sensitivities.Interest rate risk, interest rate volatility