Interest rate risk management of the bank

Interest rate risk (interest rate risk) - the absolute (relative) value or probabilistic indicator of possible losses of the entity from a given change in market interest rates for a specified period of time in the future. Changes in interest rates leads to effects in the long term can always be represented as a change in bank's own capital. In the short term, these effects can be expressed in various forms, the main ones are: 1) changes in revenue. Traditionally, this effect was given more attention, because it affects the financial performance of the bank. If before the effect of changes are considered to be equivalent to the change in net interest income of the bank, but recently more and more banks analyze revenue change in general. This is due to the fact that the share of net interest income in total income of banks is gradually decreasing, and non-interest income and expenses can be very sensitive to changes in interest rates, 2) changes in the economic value of the bank. The economic value of the bank - is the present value of expected net cash flows from balance sheet and off-balance sheet claims and liabilities, discounted at market interest rates. Economic value of the bank can be regarded as an assessment of bank's equity capital in the future, reduced to present value. Hence it is clear that changes in the economic value of the bank may have a short-term effect: changes in bank share prices, changes in credit rating (and therefore change short-term profits). Strategies for Managing Interest Rate Risk: Management of a gap, duration management, management by the use of fixed-term financial instruments (synthetic controls). Category: Management Operations Commercial Bank | Tags: control