By Andrea Sironi
This ebook offers an built-in framework for chance dimension, capital administration and price construction in banks. relocating from the size of the hazards dealing with a financial institution, it defines standards and principles to help a company coverage aimed toward maximizing shareholders' worth.
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Additional resources for Risk Management and Shareholders' Value in Banking: From Risk Measurement Models to Capital Allocation Policies
A bank should therefore equate all daily marginal gaps to zero (that is, the maturity of all assets and liabilities should be perfectly matched, with every asset facing a liability of equal value and duration). Given a bank’s role in transforming maturities, such a requirement would be completely unrealistic. Moreover, although many banks have information on marginal gaps relating to very short sub-periods, still they prefer to manage and hedge only a small set of gaps relative to certain standard periods (say: 0–1 month, 1–3 months, 3–6 months, 6–12 months, 1–3 years, 3–5 years, 5–10 years, 10–30 years, over 30 years).
Possible changes in ﬂows of interest income and expenses, and in the market value of assets and liabilities brought about by an imbalance between their maturities). An indirect effect can also occur, which is linked to the impact that rate changes can have on volumes negotiated by a bank. 1 Usually such a change also causes a decline in demand liabilities and call loans. In effect, when market rates go up, account holders usually ﬁnd it more convenient to transfer their funds to more proﬁtable types of investment.
Assume that during the year market interest rates (both on assets and liabilities) rise by one percentage point. When the certiﬁcate of deposit matures, the bank will be obliged to reﬁnance the mortgage by issuing a new CD at a higher rate (3 %), though it’s still getting a 6 % return on its investment. So, the NII would shrink from 4,000 to 3,000 euros (that is, from 4 % to 3 % of the investment). When the maturity on an asset is longer than that of a liability, the bank is exposed to reﬁnancing risk (namely, the risk that the cost associated with ﬁnancing an interest-earning position rises, resulting in a lower interest margin).