Interest rate risk: repricing gap model

24/10/14 Interest rate risk:
repricing gap model
Res$, Sironi (2008) Koch, MacDonald (2003) 1 2 1 24/10/14 IL CONCETTO DI GAP
3 4 2 24/10/14 5 Possibili strategie di gestione
•  Immunizzazione (matching) : GAP =0
•  Gap direzionale (mismatching):
–  Se si prevedono tassi in rialzo: GAP>0
–  Se si prevedono tassi in ribasso: GAP <0
•  Ipotesi forti:
–  Spread tra tassi attivi e passivi immutato quando cambiano tassi
di interesse
–  Immutabilità volumi e composizione di bilancio su iniziativa della
clientela (customer relationship)
–  Illimitato spazio di manovra nella gestione dei volumi e degli
strumenti (incompletezza, indivisibilità)
–  Modificabilità istantanea di volumi e mix (tempi di manovra)
–  Vincoli regolamentari
6 3 24/10/14 Optimal value for a bank’s GAP?
•  There is no general optimal value for a bank's GAP in
all environments.
•  GAP is a measure of interest rate risk.
•  The best GAP for a bank can be determined only by
evaluating a bank's overall risk and return profile and
objectives.
•  Generally, the farther a bank's GAP is from zero, the
greater is the bank's risk.
•  Many banks establish GAP policy targets to control
interest rate risk by specifying that GAP as a fraction
of earning assets should be plus or minus 15%, or the
ratio of RSAs to RSLs should fall between 0.9 and 1.1.
7 Speculating on the GAP.
ΔNII = (GAP) * (Δ iexp)
•  Many bank managers attempt to adjust the interest
rate risk exposure of a bank in anticipation of changes
in interest rates.
–  This activity is speculative because it assumes that
management can forecast rates better than forward
rates embedded in the yield curve.
•  Speculating on the GAP
–  Difficult to vary the GAP and win – requires accurate
interest rate forecast on a consistent basis.
–  Usually only look short term.
–  Only limited flexibility in adjusting the GAP, customers
and depositors.
–  No adjustment for timing of cash flows or dynamics of
the changing GAP position.
8 4 24/10/14 9 LA DIMENSIONE DEL BUCKET TEMPORALE:
UNA SCELTA IMPORTANTE
10 Es: GAP a 6 MESI è nullo?
5 24/10/14 11 12 6 24/10/14 13 10 14 7 24/10/14 COSA COMPORTA UN GAP POSITIVO?
15 16 8 24/10/14 17 Mettiamoci alla prova
RSA RSL Marginal Gap Cumula$ve Gap 0-‐1 mese 1-‐3 mesi 3-‐6 mesi 6-‐12 mesi 1-‐5 anni 5-‐10 anni 10-‐30 anni totale Cosa segnalano i GAP?
18 9 24/10/14 19 20 10 24/10/14 21 22 11 24/10/14 +30 bp -‐50 bp +60 bp -‐40 bp 23 24 12 24/10/14 25 26 13 24/10/14 27 28 14 24/10/14 29 30 15 24/10/14 31 32 16 24/10/14 33 34 17 24/10/14 35 36 18 24/10/14 37 Le variazioni dei tassi di interesse conseguenB a decisioni di poliBca monetaria riguardano contestualmente sia i tassi debitori che quelli creditori e si applicano con modalità tali da non recare pregiudizio al cliente». ART 10, legge 248/2006 38 19 24/10/14 39 Steps that banks can take to reduce
interest rate risk
•  Calculate periodic GAPs over short time
intervals.
•  Match fund repriceable assets with similar
repriceable liabilities so that periodic GAPs
approach zero.
•  Match fund long-term assets with noninterestbearing liabilities.
•  Use off-balance sheet transactions, such as
interest rate swaps and financial futures, to
hedge.
40 20 24/10/14 Various ways to adjust the effective rate sensitivity
of a bank’s assets and liabilities on-balance sheet.
Objective
Approaches
Reduce asset
sensitivity
Buy longer-term securities.
Lengthen the maturities of loans.
Move from floating-rate loans to term loans.
Increase asset
sensitivity
Buy short-term securities.
Shorten loan maturities.
Make more loans on a floating-rate basis.
Reduce liability
sensitivity
Pay premiums to attract longer-term deposit
instruments.
Issue long-term subordinated debt.
Increase liability
sensitivity
Pay premiums to attract short-term deposit
instruments.
Borrow more via non-core purchased liabilities.
41 Repricing gap
esercizi
42 21 24/10/14 Esercizio 1
43 Esercizio 2
44 22 24/10/14 Esercizio 3
45 Esercizio 3
46 23 24/10/14 Esercizio 4
Factors affecting NII.
•  Changes in the level of i-rates.
•  ΔNII = (GAP) * (Δiexp.)
–  Note: this assumes a parallel shift in the yield curve
which rarely occurs
•  Changes in the slope of the yield curve or the
relationship between asset yields and liability
cost of funds
•  Changes in the volume of assets and liabilities
•  Change in the composition of assets and
liabilities
47 Esercizio 4
Expected balance sheet for hypothetical bank
Expected Balance Sheet for Hypothetical Bank
Assets
Yield
Liabilities Cost
Rate sensitive
500
8.0%
600
4.0%
Fixed rate
350
11.0%
220
6.0%
Non earning
150
100
920
Equity
80
Total
1000
1000
NII = (0.08 x 500 + 0.11 x 350) - (0.04 x 600 + 0.06 x 220)
NII = 78.5 - 37.2 = 41.3
NIM = 41.3 / 850 = 4.86%
GAP = 500 - 600 = -100
48 24 24/10/14 Esercizio 4
Factors affecting net interest income
•  1% increase in the level of all short-term rates
•  1% decrease in spread between assets yields and
interest cost
–  RSA increase to 8.5%
–  RSL increase to 5.5%
•  Proportionate doubling in size.
•  Increase in RSA’s and decrease in RSL’s
–  RSA = 540, fixed rate = 310
–  RSL = 560, fixed rate = 260.
49 25

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