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Essay / Research Paper Abstract
This 22 page paper looks at different aspects of risk measurement and management by banks. The paper starts by looking at the duration model, the gap or re-pricing model and the maturity model. The second part of the paper considers how and why liquidity is so important for banks. The last part of the paper considers the case of Barings Bank in the context of the previously discussed risks and looks at the way changes in the Basel Accord II approaches operational risk. The bibliography cites 23 sources.
Page Count:
22 pages (~225 words per page)
File: TS14_TEriskintr.rtf
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are not the only models scenario analysis and value at risk may also be useful, but these latter models are not covered in this paper. If we are going
to consider the issue of interest rate risk we first need to define what is mean by interest rate risk to appreciate how these models may help measure it. The
definition of an interest rate risk is where there is a change in the revenue or the costs as a result of interest rates which will show up as profit
or loss on the profit and loss account. This can also result in a change in the value or liabilities of the assets on the balance sheet (Van Greuning, 2003,
Ross, 1990). The risks are the changing interest rates, the risk of refinancing, reinvestment risk and also the maturity and duration gap (Van Greuning, 2003, Ross, 1990). The risk is
limited to unexpected changes rate than expected changes as were there are expected they can be built into the contract and allowed foe in the return on the loan (Van
Greuning, 2003, Ross, 1990). To consider this we can consider firstly the basic net interest income model. This is stated simply that the profit is equal to the rate of
assets less the rate for liabilities which are then multiplied by the assets less the costs. Profit = (RAssets - RLiab) x Assets - Costs (Van Greuning, 2003). The
level of profits of the bank will be sensitivity changes in the interest rates of both the assets and the liabilities, but both these groups will have different maturities. There
are different components that make up this risk; the pure mismatch as seen in the yield curve slop that does not change, the relative interest risk and the client options,
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