Sensitivity of the bank to interest rate method

The larger the difference between the duration of assets and liabilities of the bank duration, the more sensitive to fluctuations in market interest rates will be the net value of the banking institutions, ie amount of capital: When an imbalance duration is positive, the market value of equity decreases with an increase in interest rates and increases with decreasing her. When the duration of the imbalance is negative, the equity value increases with interest rate, but decreases with its decrease. The Bank may make its capital is insensitive to interest rate changes only when the imbalance is zero. The larger the absolute value of the imbalance in this case, the more interest rate risk. In managing interest rate risk on the basis of analysis of duration of the bank can use two alternative strategies - Immunization balance (minimize risk), and duration management (profit maximization). When implementing an immunization strategy, ie the equality, the present value of bank assets balances the present value of bank liabilities. It is almost completely protects the bank from financial losses due to fluctuations in market rates. The selection of portfolios duration, that is the totality of the balance sheet positions, forms makrohedzh only if the present value of assets equals the present value of liabilities. A situation where the assets and liabilities of the bank as a completely balanced by the weighted average maturity, and the present value, creates a balance of immunization and protection mean any change in interest rates within the planning horizon, which is equal to the length of duration. The selection of the weighted average maturity may also happen within the individual balance sheet items of assets and liabilities, forming mikrohedzh, partially protects against interest rate risk. If for any reason the bank failed to achieve the balance of immunization, the fluctuations in market rates shown in the value of its assets and liabilities, because according to international accounting standards monetary items (and their share in the bank balance is more than 90%) have re-evaluated due to changes in market in prices. Category: Management Operations Commercial Bank