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Lecture 2: Interest rate risk - the repricing model (The repricing model,…
Lecture 2: Interest rate risk - the repricing model
Introduction
Interest rate risk
arises: FIs
mismatch
the maturities of their assets and liabilities
assets: loan
liabilities: cash from depositors
The level and movement of interest rates
interest rate volatility is directly linked to the
monetary policy
(RBA changes the cash rate)
monetary targets of
money supply
growth increased the interest rate volatility
The repricing model
also known as the
funding gap model
focus on the changes of net interest income (NII)
NII = Interest Revenue - Interest Expense
Rate sensitivity asset/ liability (RSA/RSB): an asset/ liability whose
interest rates will be priced or changed over a certain period
Rate sensitivity: time to repricing
Repricing may be result of
on
reset date
of a variable asset/ liability (some don't have fixed reset date => looks at historical data)
rollover of an asset/ liability on
maturity
Repricing gap = RSA - RSL (over the
same future period
)
Repricing risk: when the
maturity of assets exceeds the maturity of liabilities
(
short funded
: refinancing risk) or vice versa (l
ong funded
: reinvestment risk)
page 16: equity is included in liabilities side
Net interest margin = NII/ earning assets
page 19: formula
CGAP/A: provides the
direction and scale of the interest rate exposure
CGAP effects (page 31)
interest spread
= earning assets interest rate - interest rate paid on liabilities (
unequal changes in rates of RSAs and RSLs
)
if spread increases then NII increases and vice versa
Weakness of the repricing model
Market value effects
repricing model is not a complete measure
Over- aggregation
Runoffs
Off- balance sheet effect
repricing model only looks at on- balance sheet items