InterestRateRisk - Interest Rate Risk Topic 4 Outline Repricing model Maturity model Duration model 2 Central Bank and Interest Rates Target is

# InterestRateRisk - Interest Rate Risk Topic 4 Outline...

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Interest Rate Risk Topic 4
Outline Repricing model Maturity model Duration model 2
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Repricing Model Repricing or funding gap model based on book value. Contrasts with market value-based maturity and duration models recommended by the Bank for International Settlements (BIS). Rate sensitivity means time to repricing. Repricing gap is the difference between the rate sensitivity of each asset and the rate sensitivity of each liability: RSA - RSL. Refinancing risk 4
Maturity Buckets Commercial banks must report repricing gaps for assets and liabilities with maturities of: One day. More than one day to three months. More than 3 three months to six months. More than six months to twelve months. More than one year to five years. Over five years. 5
Repricing Gap Example Assets Liabilities Gap Cum. Gap 1-day \$ 20 \$ 30 \$-10 \$-10 >1day-3mos. 30 40 -10 -20 >3mos.-6mos. 70 85 -15 -35 >6mos.-12mos. 90 70 +20 -15 >1yr.-5yrs. 40 30 +10 -5 > 5 years 10 5 +5 0 6
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Applying the Repricing Model Example II: If we consider the cumulative 1-year gap, NII = (CGAP one year ) R = (-\$15 million)(.01) = -\$150,000. 8
Rate-Sensitive Assets Examples from hypothetical balance sheet: Short-term consumer loans. If repriced at year-end, would just make one-year cutoff. Three-month T-bills repriced on maturity every 3 months. Six-month T-notes repriced on maturity every 6 months. 30-year floating-rate mortgages repriced (rate reset) every 9 months. 9
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CGAP Ratio May be useful to express CGAP in ratio form as, CGAP/Assets. Provides direction of exposure and Scale of the exposure. Example: CGAP/A = \$15 million / \$270 million = 0.56, or 5.6 percent. 11
Equal Rate Changes on RSAs, RSLs Example: Suppose rates rise 2% for RSAs and RSLs. Expected annual change in NII, NII = CGAP × R = \$15 million × .01 = \$150,000 With positive CGAP, rates and NII move in the same direction. Change proportional to CGAP 12