A
bank is in short-position when it holds fewer assets with fixed
income securities than liabilities with fixed income securities.
This situation is:
>> Favourable
in the case of interest rates rise.
>> Unfavourable
in the case of interest rates decrease.
A
bank is in long-position when it holds more assets with fixed
income securities than liabilities with fixed income securities.
This situation is:
>> Favourable
in the case of interest rates decrease.
>> Unfavourable
in the case of interest rates rise.
Rates variations immediately result in the changing of the claim
value or of the debt with fixed income securities. If the claim
is negotiable on a market, its market price reflects the rate
variation and the relation market price - rates is opposite. The
gain or the loss then appears at each legacy evaluation. If the
claim or the debt is not negotiable, the claim or the debt is
reflected on the operating result of the bank until the date of
payment:
>> By imputing
on the operating result
>> In terms
of opportunity cost (shortfall vested interest according to the
new market conditions)
B-
Rate risk measure
Rate risk measure presents similarities with the one of illiquidity
risk. The establishment of a due date s profile enable to then
calculate a rate risk index.
The rate risk measures used on financial markets are calculated
on nominal amounts. It is generally the “price variation
per basis point”, meaning the variation of the prices resulting
from a movement of a basis point (0,01% of actuarial rate).
The measure used by the funds managers and by private individuals
is the sensibility which is elasticity; it means that it is calculated
in percentage of the total actualised value of the asset.
1)
The due date profile
The due date profile is a chart that classifies assets and liabilities
according to the date their interest rate is changed. This schedule
is different from the one allowing the measure of the illiquidity
risk because for the assets and liabilities with variable rates,
the date of payment and the date of change do not coincide. However,
this chart presents several similarities to the liquidity profile:
• There are as many categories of dates of payment as date
of rate reviews.
• Categories of due dates are more or less fine, depending
if the term of dates of payment are close.
• Assets and liabilities are high when taking into account
off-balance commitments.
• Assets and liabilities without rate stipulation (on sight
deposits and cash in hand, capital…) are in general banned
from the due dates profile, for they are not subjected to rate
risks.
• The due date profile of rates has to be updated regularly.
2) The calculation of rate risk index
Two ways to calculate a rate risk index will be presented:
a) The indexes calculated from the due date profile: the due date
profile enables to determine a dead-end according to the previous
definition. For each due date profile, we calculate a dead-end
that highlights the mismatching of the due dates, origin of the
rate risk. Moreover, from the profile, we can calculate:
• A sensibility ratio to the rate variations: this ratio
is calculated like this, for a given due date.
Assets sensitive to rate variations
SRR = ________________________________________________
Liabilities sensitive to rate variations
A SRR equal to the unit indicates, for the due date in question,
a perfect matching of assets and liabilities. A SRR inferior
to the nit indicates a short position, thus favourable in case
of rates rise. A SRR superior to the unit indicates, on the
contrary, a long position, thus favourable if the rates decrease.
• The effect of interest rates variations (for example
a point) on the net banking.
b) The indexes using updating: a more technical method of evaluation
of the rate risk that uses the concept of duration, duration being
a period balanced by the current value of the flows generated
by an asset or a given. More precisely:
Sum of the periods balanced by the value
Current
of all flows
Duration =____________________________________________________________
Sum of the current values of all flows
Because of its calculation method, the duration is a period indication.
It indicates “the lapse of time necessary so that the price
of an asset appreciated at its actual value is recovered”.
Thus, if the credit has duration of two years, three months and
twelve days, it means that thanks to the debtor’s interest
flows and the refund of the capital, the bank will get its loan
back at this date.
The duration is also a sensibility indicator, sensibility being
the variation of an asset value led by the interest rate variation.
Applied to the calculation of the rate risk of a bank, the duration
concept is used according to two approaches. First, we calculate
the duration of every assets and liabilities of the bank, gathered
by due dates and currencies. The total duration of the asset and
the liability is equal to the balanced mean of the durations of
each category of assets and liabilities. Three situations are
then possible; they are shown in the chart below:
| |
Situation
in case of |
| Rise
of rates |
Decrease
of rates |
-Asset
duration > liability duration
-Asset duration< liability duration
-Asset duration= liability duration |
Unfavourable
Favourable
Neutral |
Favourable
Unfavourable
Neutral |
• The decrease of rates is a favourable situation for the
bank which asset duration is superior to the liability duration
because in this case, the asset apprises more than the liability.
The rise of rates is unfavourable.
• The rise of rates is a favourable situation for the bank
which asset duration is inferior to the liability duration because
the asset depreciates less than the liability, the decrease of
rates is however unfavourable.
• The equality of the durations leads to the neutralization
of the rate risk for assets and liabilities apprise or depreciate
in the same proportions. This equality is called immunization.
We can also update the dead- ends calculated for the different
due date categories and think in terms of updates due dates. This
approach is the one of the Banking Commission and it leads to
the same conclusions than the previous ones.
C-
The management of rate risk
Without simplifying to excess, we can say that two methods of
rate risk management exist.
1) The research of immunization
The bank assigns as aim to reach the equality of assets and liabilities
durations. To do so, it has to constantly adapt the rates and
dates of payment of its assets and liabilities in order to reach
duration equality, and therefore immunization. It is how the bank,
that agrees to a credit of an “i” rate and a “d”
due date, has to simultaneously find a resource with the same
rate and due date. This perfect equality of durations is not easy
to get and to keep because like the liquidity risk, the rate risk
is inherent to the banking activity.
2) The coverage of the risk
As the rate risk is hard to neutralize, the bank has to try hard
to cover it.
First, it has to determine the risk level that seems acceptable,
for example by calculating the sensibility of its assets and liabilities
to an opposing variation of interest rates, then by comparing
this cost to the amount of equity.
Once the risk is evaluated, the bank can then cover itself by
using different banking tools of forward markets or conditionals
or rate guarantees, and it is not the aim of this work to expose
them. |
