Measurement of Banks' Exposure to Interest Rate Risk: A Financial and Managerial Perspective (La Misurazione Dell'Esposizione Al Rischio di Tasso di Interesse Negli Intermediari Bancari: Una Prospettiva Economico-Aziendale)

Abstract

The interest rate risk is the degree of exposure of a bank’s financial condition to adverse movements in interest rates. Changes in interest rates affect a bank’s earnings by changing its net interest income and the level of other interest-sensitive income and operating expenses. Changes in interest rates also affect the underlying value of the bank’s assets, liabilities and off-balance sheet instruments. Changes in banks’ competitive environment, products, and services have heightened the importance of prudent interest rate risk management. More recently, interest rates have become more volatile, and banks have arguably become more exposed to such volatility. The first section of this paper describes the primary forms of interest rate risk to which banks are typically exposed. These include repricing risk, yield curve risk, basis risk and option risk. The second section aims to review the different interest rate risk measurement models proposed by the Literature, through the two perspectives for assessing a bank’s interest rate risk exposure: the earnings perspective and the economic value perspective.

Keywords: interest rate risk, financial risk, risk exposure, risk management, earnings perspective, economic value perspective, bank balance sheet

JEL Classification: G01, G20, G21, G28, M01, M02, M10, M15