Interest Rate Risk Management - Bank Management - Lecture Slides, Slides of Banking and Finance

Download Interest Rate Risk Management - Bank Management - Lecture Slides and more Slides Banking and Finance in PDF only on Docsity! Interest Rate Risk Management Docsity.com Strategies to Manage Interest-rate Risk • Rearrange balance-sheet  Gap Management  Duration Gap Management • Off-Balance Sheet Adjustment  Interest-rate swap  Hedge with financial futures  Insurance  Transfer risk Docsity.com Off-Balance-Sheet Activities • Loan sales • Fee income from  Foreign exchange trades for customers  Servicing mortgage-backed securities  Guarantees of debt  Backup lines of credit • Trading Activities  Financial futures  Financial options  Foreign exchange futures and options  Swaps Docsity.com Standby letters of credit (SLCs) Obligations accepted by a bank for an upfront and annual fees to pay the beneficiary if the concerned client defaults on that financial obligation. Bank client can transfer the credit obligation back to the bank  Financial SLCs: backup lines of credit on bonds, notes, and commercial paper which serve as guarantee.  Performance SLCs: guarantees such as completion of construction contracts before a given date. Docsity.com Standby letters of credit (SLCs) • Considered as contingent loans. • Based on a collateralized or backed by deposits. • Banker’s risks from SLCs • Contingent risk • Liquidity risk • Capital risk • Interest rate risk • Legal risk • Material adverse change (MAC) clause that enables the bank to withdraw its commitment if the risk of the SLC changes substantially. Docsity.com Note Issuance Facilities (NIF) Medium-term agreements (2-7 years). Example: Bank guarantees the sale of a borrower’s short-term debt securities at or below pre-determined interest rates. Types of NIFs • Revolving underwriting facilities (RUFs) • Standby note issuance facilities (SNIFs) Docsity.com Note Issuance Facilities (NIF) • Bank has a commitment to buy the securities of the borrower if the borrower cannot obtain short-term funds from the securities. - Issue of Certificate of Deposits by bank borrowers. - Issue of Euronotes by non-bank borrowers (denominated in US dollars but sold outside of the US). • Banks have contingent risk, credit risk and liquidity risk. Docsity.com Securitization • Issue of debt instrument • Payments are from revenues generated by a pre defined pool of loans. • Loans are grouped on the basis of their risk similarity. • Issuance of securities to investors who earn returns based on repayments on the loans • Securitisation of collateralised industrial loans • collateralised loan obligations (CLOs) • commercial mortgage-backed securities (CMBSs) • Banks transfer loan risk to the market. • Banks reduce credit risk and interest rate risk. • Banks diversify loan portfolio to earn stable returns. Docsity.com