In the Principles of Interest Rate Risk Management issued by Basel Committee 1997, interest rate risk is defined as the possibility that the actual income of commercial banks deviates from the expected income or the actual cost deviates from the expected cost, so that the actual income is lower than the expected income or the actual cost is higher than the expected cost, thus causing commercial banks to suffer losses.
Refers to the risk that the price of financial instruments originally invested in fixed interest rates may fall when the market interest rate rises.
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Influencing factors of interest rate risk:
1, macroeconomic environment
When economic development is in the growth stage, investment opportunities increase, loanable funds's demand increases and interest rates rise; On the contrary, when the economy is in a downturn and the society is in a depression, the willingness to invest decreases, the demand for loanable funds naturally decreases, and the market interest rate is generally low.
2. Policies of the Central Bank
Generally speaking, when the central bank expands the money supply, the total supply in loanable funds will increase, the supply exceeds demand, and the natural interest rate will decrease accordingly; On the contrary, the central bank implements a tight monetary policy, reducing the money supply, so that loanable funds's demand exceeds supply, and interest rates will rise accordingly.
Stock and bond markets If the securities market is on the rise, the market interest rate will rise; On the contrary, interest rates are relatively low.
3. International economic situation
Changes in a country's economic parameters, especially changes in exchange rates and interest rates, will also affect interest rate fluctuations in other countries. Naturally, the rise and fall of the international securities market will also bring risks to the interest rates faced by international banking business.
Funding gap is a concept related to the length of time. The value of the gap depends on the length of the planning period, because the interest rate adjustment period of assets or liabilities determines whether the interest rate adjustment is related to the interest rate during the planning period.
In addition to the above-mentioned funding gap indicators, we can also measure the interest rate risk of banks with InterestRateSensitiveRatio. Bank managers gradually adopt the dynamic gap method of interest-sensitive assets and interest-sensitive liabilities, one of which is "duration gap analysis".
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