Post by Sapphire Capital on Aug 6, 2008 21:53:11 GMT 4
Quantifying the Interest Rate Risk of Banks: Assumptions Do Matter
Oliver Entrop
Catholic University of Eichstaett-Ingolstadt
Marco Wilkens
Catholic University of Eichstaett-Ingolstadt
Alexander Zeisler
Barclays Capital
Abstract:
This paper analyzes the robustness of the standardized framework suggested by the Basel Committee on Banking Supervision (2004b) to quantify the interest rate risk of banks. We generalize the Committee's model and use data on the German universal banking system which is not publicly available to study the impact of different model specifications on the estimated level of interest rate risk: the number and boundaries of the time bands, the distribution of business within the time bands, amortization rates, coupons, and the economic maturity of non-maturing deposits. We find that the respective estimates are very sensitive to these values. Depending on the model specification, banks can easily be judged as either high-risk or low-risk banks. We conclude that banking supervisors and banks should spend more effort on developing a reliable approach for measuring interest rate risk as the standardized framework can lead to significant misjudgments.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1097681_code454355.pdf?abstractid=1097681&mirid=4
Oliver Entrop
Catholic University of Eichstaett-Ingolstadt
Marco Wilkens
Catholic University of Eichstaett-Ingolstadt
Alexander Zeisler
Barclays Capital
Abstract:
This paper analyzes the robustness of the standardized framework suggested by the Basel Committee on Banking Supervision (2004b) to quantify the interest rate risk of banks. We generalize the Committee's model and use data on the German universal banking system which is not publicly available to study the impact of different model specifications on the estimated level of interest rate risk: the number and boundaries of the time bands, the distribution of business within the time bands, amortization rates, coupons, and the economic maturity of non-maturing deposits. We find that the respective estimates are very sensitive to these values. Depending on the model specification, banks can easily be judged as either high-risk or low-risk banks. We conclude that banking supervisors and banks should spend more effort on developing a reliable approach for measuring interest rate risk as the standardized framework can lead to significant misjudgments.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1097681_code454355.pdf?abstractid=1097681&mirid=4