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1、 75 CHAPTER 6 ASSET-LIABILITY MANAGEMENT:DETERMINING AND MEASURING INTEREST RATES AND CONTROLLING INTEREST-SENSITIVE AND DURATION GAPS Goals of This Chapter:The purpose of this chapter is to explore the options bankers have today for dealing with risk especially the risk of loss due to changing inte
2、rest rates and to see how a banks management can coordinate the management of its assets with the management of its liabilities in order to achieve the institutions goals.Key Topic In This Chapter Asset,Liability,and Funds Management Market Rates and Interest Rate Risk The Goals of Interest Rate Hed
3、ging Interest Sensitive Gap Management Duration Gap Management Limitations of Hedging Techniques Chapter Outline I.Introduction:The Necessity for Coordinating Bank Asset and Liability Management Decisions II.Asset/Liability Management Strategies A.Asset Management Strategy B.Liability Management Str
4、ategy C.Funds Management Strategy III.Interest Rate Risk:One of the Greatest Asset-Liability Management Strategy Challenges A.Forces Determining Interest Rates B.The Measurement of Interest Rates 1.Yield to Maturity 2.Bank Discount Rate C.The Components of Interest Rates 1.Risk Premiums 2.Yield Curv
5、es 3.The Maturity Gap and the Yield Curve D.The Response of Banks and Other Financial Firms to Interest Rate Risk IV.One of the Goals of Interest-Rate Hedging A.The Net Interest Margin B.Interest-Sensitive Gap Management 1.Asset-Sensitive Position 2.Liability-Sensitive Position 3.Interest-Sensitive
6、Gap 76 4.Interest Sensitivity Ratio 5.Computer-Based Techniques 6.Strategies in Gap Management V.The Concept of Duration A.Definition of Duration B.Calculation of Duration C.Net Worth and Duration D.Price Risk and Duration E.Convexity and Duration VI.Using Duration to Hedge Against Interest-Rate Ris
7、k A.Duration Gap 1.Dollar Weighted Duration of Assets 2.Dollar Weighted Duration of Liabilities 3.Positive Duration Gap 4.Negative Duration Gap B.Change in the Banks Net Worth VII.The Limitations of Duration Gap Management VIII.Summary of the Chapter Concept Checks 6-1.What do the following terms me
8、an:Asset management?Liability management?Funds management?Asset management refers to a banking strategy where management has control over the allocation of bank assets but believes the banks sources of funds(principally deposits)are outside its control.Liability management is a strategy of control o
9、ver bank liabilities by varying interest rates offered on borrowed funds.Funds management combines both asset and liability management approaches into a balanced liquidity management strategy.6-2.What factors have motivated banks and many of their competitors to develop funds management techniques i
10、n recent years?The necessity to find new sources of funds in the 1970s and the risk management problems encountered with troubled loans and volatile interest rates in the 1970s and 1980s led to the concept of planning and control over both sides of a banks balance sheet-the essence of funds manageme
11、nt.6-3.What forces cause interest rates to change?What kinds of risk do bankers and other financial firms face when interest rates change?Interest rates are determined,not by individual banks,but by the collective borrowing and lending decisions of thousands of participants in the money and capital
12、markets.They are also impacted by changing perceptions of risk by participants in the money and capital markets,especially the risk of borrower default,liquidity risk,price risk,reinvestment risk,inflation risk,term or maturity risk,marketability risk,and call risk.77 Bankers can lose income or valu
13、e no matter which way interest rates go.Rising interest rates can lead to losses on bank security instruments and on fixed-rate loans as the market values of these instruments fall.Falling interest rates will usually result in capital gains on fixed-rate securities and loans but a bank will lose inc
14、ome if it has more rate-sensitive assets than liabilities.Rising interest rates will also cause a loss to bank income if a bank has more rate-sensitive liabilities than rate-sensitive assets.6-4.What makes it so difficult to correctly forecast interest rate changes?Interest rates cannot be set by an
15、 individual bank or even by a group of banks;they are determined by thousands of investors trading in the credit markets.Moreover,each market rate of interest has multiple components-the risk-free interest rate plus various risk premia.A change in any of these rate components can cause interest rate
16、s to change.To consistently forecast market interest rates correctly would require bankers to correctly anticipate changes in the risk-free interest rate and in all rate components.Another important factor is the timing of the changes.To be able to take full advantage of their predictions,they also
17、need to know when the changes will take place.6-5.What is the yield curve and why is it important for bankers to know about its shape or slope?The yield curve is a graphical description of the distribution of market interest rates by maturity of financial instrument.The slope of the yield curve dete
18、rmines the spread between long-term and short-term interest rates.In banking most of the long-term rates apply to loans and securities(i.e.,bank assets)and most of the short-term interest rates are attached to bank deposits and money market borrowings.Thus,the shape or slope of the yield curve has a
19、 profound influence on a banks net interest margin or spread between asset revenues and liability costs.6-6.What is it that a bank or other lending institutions wishes to protect from adverse movements in interest rates?A bank wishes to protect both the value of bank assets and liabilities and the r
20、evenues and costs generated by both assets and liabilities from adverse movements in interest rates.6-7.What is the goal of hedging?The goal of hedging in banking is to freeze the spread between asset returns and liability costs and to offset declining values on certain assets by profitable transact
21、ions so that a target rate of return is assured.6-8.First National Bank of Bannerville has posted the following financial statement entries:Interest revenues$63 million Interest costs$42 million Total earning assets$700 million The banks net interest margin must be:78 Net Interest=$63 mill.-$42 mill
22、.=0.03 or 3 percent Margin$700 mill.If interest revenues and interest costs double while earning assets grow by 50 percent,the net interest margin will change as follows:($63 mill.-$42 mill.)*2=0.04 or 4 percent$700 mill.*(1.50)Clearly the net interest margin increases-in this case by one third.6-9.
23、Can you explain the concept of gap management?Gap management involves determining the maturity distribution and the repricing schedule for a banks assets and liabilities.When more assets are subject to repricing or will reach maturity in a given period than liabilities or vice versa,the bank has a G
24、AP and is exposed to loss from adverse interest-rate movements based on the gaps size.6-10 When is a bank or other financial intermediary asset sensitive?Liability sensitive?A financial institution is asset sensitive when it has more interest-rate sensitive assets maturing or subject to repricing du
25、ring a specific time period than rate-sensitive liabilities.A liability sensitive position,in contrast,would find the financial institution having more interest-rate sensitive deposits and other liabilities than rate-sensitive assets for a particular planning period.6-11.Commerce National Bank repor
26、ts interest-sensitive assets of$870 million and interest-sensitive liabilities of$625 million during the coming month.Is the bank asset sensitive or liability sensitive?What is likely to happen to the banks net interest margin if interest rates rise?If they fall?Because interest-sensitive assets are
27、 larger than liabilities by$245 million the bank is asset sensitive.If interest rates rise,the banks net interest margin should rise as asset revenues increase by more than the resulting increase in liability costs.On the other hand,if interest rates fall,the banks net interest margin will fall as a
28、sset revenues decline faster than liability costs.6-12.Peoples Savings Bank has a cumulative gap for the coming year of+$135 million and interest rates are expected to fall by two and a half percentage points.Can you calculate the expected change in net interest income that this thrift institution m
29、ight experience?What change will occur in net interest income if interest rates rise by one and a quarter percentage points?Expected Change in =$135 million*(-0.025)=-$3.38 million Net Interest Income 79 What change will occur in net interest income if interest rates rise by one and a quarter percen
30、tage points?Expected Change in Net Interest =$135 million*(+0.0125)=+$1.69 million Income 6-13 How do you measure the dollar interest-sensitive gap?The relative interest-sensitive gap?What is the interest-sensitivity ratio?The dollar interest-sensitive gap is measured by taking the repriceable(inter
31、est-sensitive)assets minus the repriceable(interest-sensitive)liabilities over some set planning period.Common planning periods include 3 months,6 months and 1 year.The relative interest-sensitive gap is the dollar interest-sensitive gap divided by some measure of bank size(often total assets).The i
32、nterest-sensitivity ratio is just the ratio of interest-sensitive assets to interest sensitive liabilities.Regardless of which measure you use,the results should be consistent.If you find a positive(negative)gap for dollar interest-sensitive gap,you should also find a positive(negative)relative inte
33、rest-sensitive gap and an interest sensitivity ratio greater(less)than one.6-14 Suppose Carroll Bank and Trust reports interest-sensitive assets of$570 million and interest-sensitive liabilities of$685 million.What is the banks dollar interest-sensitive gap?Its relative interest-sensitive gap and in
34、terest-sensitivity ratio?Dollar Interest-Sensitive Gap=Interest-Sensitive Assets Interest Sensitive Liabilities =$570-$685=-$115 Relative Gap=$IS Gap=-$115=-0.2018 or-20.18 percent Bank Size$570 Interest-Sensitivity=Interest-Sensitive Assets=$570=.8321 Ratio Interest-Sensitive Liabilities$685 6-15 E
35、xplain the concept of weighted interest-sensitive gap.How can this concept aid management in measuring a financial institutions real interest-sensitive gap risk exposure?Weighted interest-sensitive gap is based on the idea that not all interest rates change at the same speed.Some are more sensitive
36、than others.Interest rates on bank assets may change more slowly than interest rates on liabilities and both of these may change at a different speed than those interest rates determined in the open market.In,the weighted interest-sensitive gap methodology all interest-sensitive assets and liabiliti
37、es are given a weight based on their speed(sensitivity)relative to some market interest rate.Fed Funds loans,for example,have an interest rate which is determined in the market and which would have a weight of 1.All other loans,investments and deposits would have a weight based on their speed relati
38、ve to the Fed Funds rate.To determine the interest-sensitive gap,the dollar amount of each type of asset or liability would be multiplied by its 80 weight and added to the rest of the interest-sensitive assets or liabilities.Once the weighted total of the assets and liabilities is determined,a weigh
39、ted interest-sensitive gap can be determined by subtracting the interest-sensitive liabilities from the interest-sensitive assets.This weighted interest-sensitive gap should be more accurate than the unweighted interest-sensitive gap.The interest-sensitive gap may change from negative to positive or
40、 vice versa and may change significantly the interest rate strategy pursued by the bank.6-16.What is duration?Duration is a value-weighted measure of the maturity of a security or other income-generating asset that takes into consideration the amount and timing of all cash flows expected from the as
41、set 6-17.How is a financial institutions duration gap determined?A banks duration gap is determined by taking the difference between the duration of a banks assets and the duration of its liabilities.The duration of the banks assets can be determined by taking a weighted average of the duration of a
42、ll of the assets in the banks portfolio.The weight is the dollar amount of a particular type of asset out of the total dollar amount of the assets of the bank.The duration of the liabilities can be determined in a similar manner.6-18.What are the advantages of using duration as an asset-liability ma
43、nagement tool as opposed to interest-sensitive gap analysis?Interest-sensitive gap only looks at the impact of changes in interest rates on the banks net income.It does not take into account the effect of interest rate changes on the market value of the banks equity capital position.In addition,dura
44、tion provides a single number which tells the bank their overall exposure to interest rate risk.6-19.How can you tell you are fully hedged using duration gap analysis?You are fully hedged when the dollar weighted duration of the assets portfolio of the bank equals the dollar weighted duration of the
45、 liability portfolio.This means that the bank has a zero duration gap position when it is fully hedged.Of course,because the bank usually has more assets than liabilities the duration of the liabilities needs to be adjusted by the ratio of total liabilities to total assets to be entirely correct.6-2
46、0.What are the principal limitations of duration gap analysis?Can you think of some ways of reducing the impact of these limitations?There are several limitations with duration gap analysis.It is often difficult to find assets and liabilities of the same duration to fit into the banks portfolio.In a
47、ddition,some accounts such as deposits and others dont have well defined patterns of cash flows which makes it difficult to calculate duration for these accounts.Duration is also affected by prepayments by customers as well as default.Finally,duration analysis works best when interest rate changes a
48、re small and short and long term interest rates change by the same amount.If this is not true,duration analysis is not as accurate.81 6-21.Suppose that a thrift institution has an average asset duration of 2.5 years and an average liability duration of 3.0 years.If the bank holds total assets of$560
49、 million and total liabilities of$467 million,does it have a significant duration gap?If interest rates rise,what will happen to the value of the banks net worth?Duration Gap=DA DL*AssetssLiabilitie=2.5 yrs.3.0 yrs.million$560million$467 =2.5 years 2.5018 years =-0.018 years This bank has a very sli
50、ght negative duration gap;so small in fact that we could consider it insignificant.If interest rates rise,the banks liabilities will fall slightly more in value than its assets,resulting in a small increase in net worth.6-22.Stilwater Bank and Trust Company has an average asset duration of 3.25 year