Banking Book Risk And NII (GAPs)

Question 1

What is IRRBB (Interest Rate Risk in Banking Books)?

Answer 1

IRRBB refers to the current or prospective risk to the bank’s capital and earnings arising from adverse movements in interest rates that affect the bank’s banking book positions.

Question 2

What are the two major risk management metrics?

Answer 2

1. Net Interest Income
2. Economic Value of Equity

Question 3

What is refinancing risk?

Answer 3

Interest rate risk which arises when maturity of assets is higher than the maturity of liabilities. If IR goes up you will have to may more for liabilities while getting same payments from assets.

Question 4

What is reinvestment risk?

Answer 4

Interest rate risk that arises when maturity of assets is shorter than maturity of liabilities. If IR goes down you will now have the same liability payments to make, while getting lower payments from your assets.

Question 5

What is a sensitive asset/liability

Answer 5

An asset or a liability is “sensitive” if, in the relevant time period (“gapping period”), it reaches its maturity or there is a renegotiation of the interest rate.

Question 6

What is the repricing gap formula?

Answer 6

G = SA-SL

Question 7

What is the formula for the change in net interest income based in the repricing gap?

Answer 7

ΔNII = Δi_aSA-Δi_lSL
if Δi_a=Δil=Δi
ΔNII = G*Δi, where G = (SA-SL)

Question 8

How is the adjustment for maturity of the asset/liability done?

Answer 8

Δi_a = SA(1-p)Δi

Question 9

What is the formula for the maturity adjusted Gap?

Answer 9

ΔNII = (ΣSA_j(1-p_j)-ΣSL_k(1-p_k)Δi=G^MAΔi

Question 10

What are some of the MAGAP limits and problems?

Answer 10

*Assumption of a uniform change of assets and liabilities’ interest rates.
*Assets & Liabilities with no maturity (e.g. call deposits)
*The model does not consider effects on the market value of A/L.
*Assumption of a uniform change of interest rates for different maturities.
*The model does not consider the effects of an interest rate change on the volume of assets and liabilities

Question 11

What is the formula for the standardized gap?

Answer 11

SG = Σ(SA_iβ_i)-Σ(SL_jβ_j)