week3 - Bank BankManagement Week3:S&Ldebacleand...

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ank Management Bank Management Week 3: S&L debacle and terest Rate Risk (I) Interest Rate Risk (I) Ref: FIM Chapter 2 and Chapter 8
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Yields on US Treasury and Fed Fund Rate 25 3 month 1 year 5 year 10 year Fed Fund 20 15 10 5 0 Jan-34 Jan-37 Jan-40 Jan-43 Jan-46 Jan-49 Jan-52 Jan-55 Jan-58 Jan-61 Jan-64 Jan-67 Jan-70 Jan-73 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
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Interest Rate Risk Interest rate risk resulting from intermediation: ismatch in maturities of assets and liabilities Mismatch in maturities of assets and liabilities. Interest rate sensitivity difference exposes equity to changes in interest rates Balance sheet hedge via matching maturities of assets and liabilities is problematic for FIs. Inconsistent with asset transformation role Interest rate risk is placed within operational risk under New Accord
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anable Funds Theory Loanable Funds Theory terest rates reflect supply and demand for Interest rates reflect supply and demand for loanable funds ifts in supply or demand generate interest Shifts in supply or demand generate interest rate movements as market forces establish a ew equilibrium new equilibrium
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etermination of Interest Rates Determination of Interest Rates Suppose that the market’s best guess is that future short term rates will equal today’s rates What would happen if a bank posted the following rates? Maturity (yrs) Deposit Rate Mortgage Rate 13 % 6 % 53 % 6 % How can the bank manage its risks?
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etermination of Equilibrium Interest Rates Determination of Equilibrium Interest Rates
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Key factors that affect interest rate risk Central Bank Monetary Policy pen market operations Open market operations Targeting Regimes onborrowed serves targeting regime Nonborrowed reserves targeting regime Borrowed reserves targeting regime reign Exchange Rate Foreign Exchange Rate Financial market integration, globalization
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Bad Interest Rate Risk Management Has Led to Bank Failures Savings and Loans ontinental Illinois Continental Illinois
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easuring Interest Rate Risk: Idea Measuring Interest Rate Risk: Idea isk of loss due to an nfavourable ange in Risk of loss due to an unfavourable change in interest rates nder what conditions would a bank never Under what conditions would a bank never
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This note was uploaded on 02/29/2012 for the course FINANCE FIN 3117 taught by Professor Lina during the Spring '12 term at National University of Singapore.

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week3 - Bank BankManagement Week3:S&Ldebacleand...

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