Sie sind auf Seite 1von 12

Chapter 8

Interest Rate Risk:

the Repricing Model

Overview

This chapter explains how an alternative model of measuring an FI’s exposure to interest rates, the repricing model, works.

We will discuss the particular weaknesses of the model.

A few definitions

Rate sensitivity assets (RSA) and liabilities (RSL): assets and liabilities whose interest rates will be repriced (changed) over the planning horizon

Repricing date: the date on which the interest rate changesrates will be repriced (changed) over the planning horizon – 5-year variable rate loans with interest

5-year variable rate loans with interest rate adjusted every 6 months

rate loans with interest rate adjusted every 6 months • Repricing (funding) gap : RSA –

Repricing (funding) gap: RSA – RSL

Note: any discussion of RSA and RSL is relative to the planning horizon– 5-year variable rate loans with interest rate adjusted every 6 months • Repricing (funding) gap

Rate-Sensitive Assets

Examples:

Short-term loans.

T-Notes (of various maturities).

Floating-rate long-term loans.

The question to ask is:

Will or can this asset have its interest rate changed within the planning horizon? Yes? Rate-sensitive.

No? Not rate-sensitive.

For assets with maturity shorter than the planning horizon, what matters is the reinvestment rate.

Rate-Sensitive Liabilities

Examples:

Term deposits (of various maturities).

All roll-over credits, such as Bankers acceptances, certificates of deposits (CDs), commercial papers

The question to ask is:

Will or can this liability have its interest rate changed within the planning horizon?

Yes? Rate-sensitive.

No? Not rate-sensitive.

For liabilities with maturity shorter than the planning horizon, what matters is the refinance rate.

The Repricing Model

Measure of interest rate risk exposure: the difference between RSA and RSL

Repricing Gap or Funding Gap

Positive gap (RSA > RSL), exposed to the risk of interest rate decrease

Negative gap (RSA < RSL), exposed to the risk of interest rate

increase Example: Consider the following repricing gaps (in $ million).

Repricing bucket

Assets

Liabilities

Gaps

1

day

$50

$25

$25

1

day to 3 months

10

40

-30

3

to 6 months

50

80

-30

6

to 12 months

30

60

-30

1

to 5 years

70

10

+60

Over 5 years

10

5

+5

 

$220

$220

0

Why care about repricing gap?

Effect of interest rate change on FI’s net interest income in a particular repricing bucket

NII i = (RSA i - RSL i ) R i = (GAP i )R i

Where:

NII i = change in net interest income in the ith bucket, GAP i = the dollar size of the gap between the book value of assets and liabilities in maturity bucket i, R i = the change in the level of interest rates impacting assets and liabilities in the ith bucket.

In the previous case, if the overnight interest rate rises by 1%, then:

NII i = $25 million × 0.01 = $250,000.

The Cumulative Repricing Gap

For a specific planning horizon (for example, one year), what is the effect of interest rate change in the horizon on the net interest income? The Cumulative Gap (CGap): the difference between all RSAs and RSLs with repricing date shorter than the planning horizon NII i = (CGAP i )R i

Reconsider the previous table, the cumulative gap for 1-year horizon is -65$M. • Assume ∆ R i = 1% is the average rate change that affects assets Assume R i = 1% is the average rate change that affects assets and liabilities that can be repriced within a year. NII i = (CGAP i )R i

within a year. • ∆ NII i = (CGAP i ) ∆ R i = (-$65

= (-$65 million) (0.01)

= -$650,000.

Repricing bucket

Assets

Liabilities

Gaps

CGap

1

day

$50

$25

$25

$25

1

day to 3 months

10

40

-30

-5

3

to 6 months

50

80

-30

-35

6

to 12 months

30

60

-30

-65

1

to 5 years

70

10

+60

-5

Over 5 years

10

5

+5

0

 

$220

$220

0

 

Unequal Changes in Rates

If changes in rates on RSAs and RSLs are not equal, the spread changes; In this case, NII = (RSA × R RSA ) - (RSL × R RSL )

Further, the changes in interest rates may be different for assets or liabilities over different repricing buckets.

The Repricing Model vs The Duration Model

Repricing model focuses on the interest income/cost effect, while duration model focuses on the value effect.

Interest income/costs are calculated based on the book value of assets/liabilities, while duration is used to calculate the change in the market value.

Weaknesses of the Repricing Model

Market value effects:

Interest rate changes can adversely affect the market value of assets and liabilities, and thus the net worth of an FI.

As such, the repricing model is only a partial measure of interest rate risk.

model is only a partial measure of interest rate risk. • Runoffs: – Periodic cash flow

Runoffs:

Periodic cash flow of interest and principal amortization payments on long-term assets, for example, monthly payments or pre-payment from 30-year mortgage loans

The reinvestment of these cash flows is rate-sensitive though the assets may be rate insensitive.

Similar runoff issues for long-term liabilities.

Solution: Predict the amount of runoffs for the long-term assets and liabilities, and make them RSA/RSL.

Weaknesses of the Repricing Model (Cont.)

Off-balance-sheet items are not included

Over-aggregation:

Rate-sensitive assets and rate-sensitive liabilities might not be evenly distributed within a maturity bucket.

Depends on the definitin of maturity buckets or bins.

might not be evenly distributed within a maturity bucket. – Depends on the definitin of maturity