PDF《William B English》

BIS Quarterly Review, December

2002 67 William B English +41

61 280

8514 bill.

english@bis.org Interest rate risk and bank net interest margins1 Banks and their supervisors have spent considerable time and effort in recent years developing systems for monitoring and managing interest rate risk.

2 This special feature examines that specific component of interest rate risk arising from the possible effects of changes in market interest rates on bank net interest margins. Such effects can be very large if interest rate risk is not managed carefully. For example, the secondary banking crisis in the United Kingdom in the 1970s reflected, at least in part, the funding of longer-term assets with short-term liabilities.

3 Similarly, funding of long-term, fixed rate mortgages with savings deposits led to a very sharp drop in net interest margins at US thrift institutions in the early 1980s when interest rates rose to historic highs and the yield curve inverted. The result was actually negative net interest income for two years at US thrifts, after net interest margins had averaged nearly 1.5% over the preceding decade (FHLBB (1984)). By contrast, the results presented here suggest that commercial banks in the

10 industrial countries considered have generally managed their exposures to volatility in the yield curve in ways that have limited effects on their net interest margins. Thus, while fluctuations in net interest margins could be an important source of uncertainty in bank profitability C and could surely have adverse effects for particular institutions C changes in interest rates seem unlikely to undermine sharply the health of the banking sector through their effects on net interest income. The next section provides background on interest rate risk at banks, and discusses methods for assessing it. Given data limitations, the approach taken here focuses on the effects of market interest rates on the average yields on bank assets and liabilities and also on bank net interest margins. The subsequent section reports on the empirical findings. A final section provides some concluding remarks and caveats.

1 The views expressed in this article are those of the author and do not necessarily reflect those of the BIS. Gert Schnabel provided invaluable assistance with the data.

2 For a detailed discussion of interest rate risk, see BCBS (2001). For a broader perspective on bank supervision, see BCBS (1997).

3 For a discussion of this crisis, see Remolona et al (1990).

68 BIS Quarterly Review, December

2002 Assessing interest rate risk A bank'

s interest rate risk reflects the extent to which its financial condition is affected by changes in market interest rates. There are two different ways of thinking about such effects. The first approach focuses on the impact of changes in market interest rates on the value of bank assets, liabilities and off- balance sheet positions (potentially including those that are not marked to market for reporting purposes), and so arrives at an overall assessment of the impact of changes in market interest rates on the economic value of the bank. The second approach focuses on the implications of movements in market rates for the future cash flows that the bank will obtain. Since the present discounted value of the bank'

s cash flows must equal the economic value of the bank, these two approaches are consistent and both can be useful. For example, a focus on flows may suggest impending liquidity problems as cash flow dwindles. Alternatively, a sharp decline in economic value may imply that the bank is insolvent, even if operations continue to provide cash in the near term. In either case, action on the part of both bank managers and national authorities would seem appropriate. To assess directly the extent of a bank'