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1、BANK MANAGEMENT&FINANCIAL SERVICES,CHAPTER FOURRisk Management for changing interest rates:asset-liability management and duration techniques,Key topicsAsset,Liability,and Funds ManagementMarket Rates and Interest Rate RiskThe Goals of Interest Rate HedgingInterest-Sensitive Gap ManagementDuration G
2、ap ManagementLimitations of Interest Rate Risk Management Techniques,Asset-Liability Management Strategies,Asset Management StrategyPrevailed Before 1960s.This view held that the amount and kinds of deposits and the volume of other borrowed funds were largely determined by its customers.The key deci
3、sion area for banker was the assets.,Liability Management StrategyPrevailed in the 1960s.Confronted with fluctuating interest rates and intense competition for funds,bankers began to devote greater attentions to opening up new sources of funding and monitoring the mix and cost of their deposit and n
4、ondeposit liabilities.,Funds Management StrategyThis view has began to prevail since 1970s.A more balanced approach to asset-liability management.Several key objectives:Management should exercise as much control as possible over the volume,mix,and return or cost of both assets and liabilities.Manage
5、ment control over assets must be coordinated with its control over liabilities.Revenues and costs arise from both sides of the balance sheet.,Interest Rate Risk,Price Risk When Interest Rates Rise,the Market Value of the Bond or Asset FallsReinvestment RiskWhen Interest Rates Fall,the Coupon Payment
6、s on the Bond are Reinvested at Lower Rates,Interest Rate Risk for Banks(PrinciplesforthemanagementofIntenseRateRisk,1997),重新定价风险（Repricing Risk）基差风险（Basis Risk）收益率曲线风险（Yield Curve Risk）期权风险（Optionality）,Measurement of interest Rates,Yield to Maturity(YTM)The discount rate that equalizes the current
7、 market value of a loan or security with the expected stream of future income payments that the loan or security will generate.,Where:CF is the expected cash flow,Components of Interest Rates,Various Risk PremiumsDefault Risk Inflation Risk Liquidity RiskCall Risk,Yield curves,The graphic picture of
8、 how interest rates vary with different maturities of loans viewed at a single point in time(and assuming that all other factors,such as credit risk,are held constant)is called a yield curve.Most lending institutions experience a positive maturity gap,so they prefer to upward-sloping yield curve,not
9、 horizontal or downward-sloping yield curve.Modern financial theory tends to associate upward-sloping yield curves with rising interest rates and with expansion in the economy,a negatively sloped yield curve with falling interest rates and with recession in economy.,Goal of Interest Rate Hedging,One
10、 Important Goal of Interest Rate Hedging is to Insulate the Bank from the Damaging Effects of Fluctuating Interest Rates.Management must concentrate on those interest-sensitive assets and liabilities,including loans and investments on the asset side and borrowings on the liability side.,Interest-Sen
11、sitive Gap Measurements(1),Interest-Sensitive Gap Measurements(2),What are Interest-Sensitive Assets?,Short-Term Securities Issued by the Government and Private BorrowersShort-Term Loans Made by the Bank to Borrowing CustomersVariable-Rate Loans Made by the Bank to Borrowing CustomersVariable-Rate s
12、ecurities.,What are Interest-Sensitive Liabilities?,Borrowings from Money MarketsShort-Term Savings AccountsMoney-Market DepositsVariable-Rate Deposits,Interest-Sensitive Gap Management,Steps for Conducting IS GAP AnalysisDevelop Interest Rate ForecastsSelect the Sequential Time Intervals for Determ
13、ining When Assets and Liabilities Are Rate-SensitiveGroup Assets and Liabilities Into Time“Buckets”Forecast Changes in Net Interest Income for a Variety of Interest Rate Scenarios,Gap Positions and the Effect of Interest Rate Changes on the Bank,Aggressive Interest-Sensitive Gap Management,Defensive
14、 Interest-Sensitive Gap Management,Dollar Interest-Sensitive Gap is ZeroRelative Interest-Sensitive Gap is ZeroInterest Sensitivity Ratio is One When Interest Rates Change in Either Direction-NIM is Protected and Will Not Change,Problems with Interest-Sensitive Gap Management,Interest paid on liabil
15、ities tend to move faster than interest rates earned on assets;Interest rate attached to bank assets and liabilities do not move at the same speed as market interest rates;Point at which some assets and liabilities are repriced is not easy to identify;Interest-sensitive gap does not consider the imp
16、act of changing interest rates on equity position;Interest-sensitive gap does not consider the impact of changing interest rates on the quality of the loan portfolio.,Duration as a Risk-Management Tool,Introduction,A rise in market rates of interest will cause the market value(price)of both fixed-ra
17、te assets and liabilities to decline.The longer the maturity of a financial firms assets and liabilities,the more they will tend to decline in market value(price)when market interest rates rise.A change in net worth due to changing interest rates will vary depending upon the relative maturities of a
18、 financial institutions assets and liabilities.,What is Duration?,Duration is a value-and time-weighted measure of maturity that considers the timing of all cash inflows from earning assets and all cash outflows associated with liabilities.In other words,Duration is the weighted average maturity of
19、a promised stream of future cash flows.The standard formula for calculating the duration(D)of an individual financial instrument.,Price sensitivity to changes in interest rates and Duration,For example,A coupon bond with a duration of four years and a current market value(price)of$1000.If market int
20、erest rates attached to comparable bonds are about 10 percent currently,and recent forecasts suggest that market rate may rise to 11 percent,then what percentage change will occur in the bonds market value?,Using D to hedge against interest rates risk,Duration of an asset portfolioDuration of a liab
21、ility portfolio,Duration gap,Leverage adjusted duration gap,The impact of changing market rates on net worth,Limitations of Duration Gap Management,Finding assets and liabilities of the same duration can be difficult.Some assets and liabilities may have patterns of cash flows that are not well defined.Customer prepayments may distort the expected cash flows in duration.Customer defaults may distort the expected cash flows in duration.Convexity can cause problems.,Homeworks,Key wordsYield to maturity,yield curve,asset-sensitive gap,liability-sensitive gap,duration No.8No.9No.11No.12No.15No.16,
