讲义分析讲稿1

1、Lecture 6Dr Vassilis LogothetisPart3: Challenges of International Banking Major ReadingsCasu et al., 2015, Chapter 11-12Matthews and Thompson, 2008, Chapter 14 Heffernan, 2016, Chapter 3, Simons K (1996), “Value at Risk - New Approaches to Risk Management”, New England Economic Review, Federal Reser

2、ve Bank of Boston, Sep/OctJackson P (1995), “Risk Measurement and Capital Requirements for Banks”, Bank of England Quarterly Bulletin, May, Vol. 35, 2Hopper G (1996), “Value at Risk: A New Methodology for Measuring Portfolio Risk”, Business Review, Federal Reserve Bank of Philadelphia, July-August,L

3、earning eTo define the most common risks in bankingTo distinguish between the various risks in bankingTo understand the importance of the interrelationship among banking risksTo apply the model of risk measurement and know how to manage different riskRisk and Risk ManagementRisk?Risk management?Bank

4、ing Risk“ The fact is that bankers are in the business of managing risk. Pure and simple, that is the business of banking”Walter Wriston, former CEO of Citibank;The Economist , 10, April 1993Management of banking risk in generalRisk Management by banking firms:Identification and measurement of indiv

5、idual and total risk.Precaution and actions to reduce those risks.Compliance of appropriate regulations.Banks risk management should differ from other firmsBanks are special in the following settings:Banks governance differs from other firms.Banks are highly leveraged.Banks have opaque business mode

6、ls (Non Performing Loan, Non interest bearing e).Safety net subsidies (Deposit Insurance Scheme, Too Big Too Fail) Corporate governance in bankingTraditional Focus of Risk ManagementArisen out of the main business of intermediation - the banking bookCredit riskLiquidity riskInterest rate riskOther a

7、reas associated with the organisational part - operational riskRecent Focus of riskBanks have e involved in the trading of securities, derivatives and currencies. These activities give rise to market risk that also include interest rate risk.Recent focus of risk management is on the trading book - s

8、hort-term profit making.Bank Risk TypologyMarket or Price Risk-interest rate risk, equity risk , commodity risk and currency risk.Credit risk and Counterparty risk.Liquidity or funding risk.Country and Sovereign risk.Operational risk.Off balance sheet risk.Capital Risk and Solvency.Market RiskMarket

9、 risk Potential loss or price decline over a period of time related to unexpected movements in market risk factors (equity, commodity, currency).Risk factors: interest rates, currencies, equities, and commodities.Foreign currency bond currency risk + interest rate riskEquity swap equity risk + inter

10、est rate riskmain source of interest rate risk is: volatility mismatch of assets and liabilityInterest Rate RiskMarket risk:the risk lenders and borrowers face while going for refinancing and reinvestment is called interest rate risk. -Yield curve level risk - equal change of rates over all maturiti

11、es.-Yield curve shape risk - changes in relative rates of different maturities-Basis risk - changes in rates of equivalent maturity but pegged to different index, e.g. Funding at 6-month LIBOR and invest in 6-month Treasury Bill rateRefinancing riskReinvestment riskForeign currency riskInterest rate

12、 riskYield curve level risk - equal change of rates over all maturities.Yield curve shape risk - changes in relative rates of different maturities.Basis risk - changes in rates of equivalent maturity but pegged to different index, e.g. Funding at 6-month LIBOR and invest in 6-month TBR.Measurement o

13、f interest rate riskGap analysisDuration analysisInterest Risk MeasurementGap AnalysisGap is the difference between interest sensitive assets and liabilities over a specific time interval.-Negative gap = interest sensitive liabilities interest sensitive assets.-Positive gap = interest sensitive asse

14、ts interest sensitive liabilities Rate-sensitivity and positive gap Maturity bucket gap (mil) Strategic matrix for profit maximisationEarning at Risk (EaR)Months0-33-6AssetsPersonal Loans3030Corp. Loans20050Interbank loans5050Bonds1010Total290140LiabilitiesDem. Deposits500Time Deposits150Interbank D

15、eposits100140Total600290Gap-310-150Impact on EaR of a rise in interest rateWhat is the impact of an increase/decrease in the net interest margin of a change in the rate of interest?-First quarter gap is -310EaR = |gap| (r) = 310 (.01/4) = 0.775-If the volatility of interest rates is known, then we c

16、an evaluate EaR for a 95% confidence levelEaR95% = |gap| (r1.65)Interest Risk MeasurementDurationMeasure of the average time to maturity of a series of cash flows. Duration/Effective maturity = Note sum of PVs = 10,000 = P0 Duration = 44,651/10,000 = 4.47 yearsDuration Gap and SensitivityExample of

17、Duration Gap AnalysisPortfolio Immunisation using Duration Gap Analysis in shortImmunisation of a portfolio requires dG = 0If the book is duration matched DA = DL = T, then it is immunised against any change in interest rates.In practice banks borrow short and lend long, a rise in interest rates wil

18、l reduce the market value of assets more than liabilities.Increase in rates will reduce the net market value of the bank. Hence a bank manager will devise strategies to deal with the various scenarios possible.Interest Rate Risk Managementusing derivativeForward rate agreement on future interest rat

19、e.Interest rate Swap.Option.Interest Rate Risk ManagementForward Rate AgreementsAgreement now on the rate which will apply in the futureBased on a notional principle the purchaser will receive/make a payment in respect of the gap between the contract and the actual rate.E.g. Say agreed forward rate

20、in 3 months time is 8% and the actual rate is 9%, on a notional principal of 1,000,000 the purchaser of the FRA will receive:If the rate fell to 7%, the buyer would pay 2500Interest Rate Risk ManagementSwapsA basic or vanilla swap occurs when two parties agree to exchange cash flows on a notional principleNormal contract is fixed v floating rates of interest where A pays B a fixed rate and B pays A a floating rate. Only the in