Interest Rate Risk in the Banking Book: The trade-off between delta EVE and delta NII

Engbersen, P.J.F. (2017) Interest Rate Risk in the Banking Book: The trade-off between delta EVE and delta NII.

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Abstract:The low interest rate environment has made Interest Rate in the Banking Book (IRRBB) an interesting topic. The Basel Comittee on Banking Supervision (BCBS) made new guidelines for regulations available in April 2016. It stated that both delta EVE and delta NII as economic value and earnings perspectives to IRRBB should be taken into account when assessing IRRBB. Several studies have shown that these perspectives relate to each other and can even cause a trade-off when minimising both. Present study is performed to investigate this trade-off and the use of delta EVE and delta NII measures. By means of a case study and balance sheet data made available by a Dutch bank this trade-off was assessed. A Linear Programming (LP) model was constructed to optimise the hedging portfolio based on IRRBB constraints. The results indicate that for this specific data set the delta EVE and delta NII had very little impact on each other. It also can be derived that plain vanilla swaps could effectively hedge the delta EVE and delta NII.
Item Type:Essay (Bachelor)
Clients:
Deloitte, Amsterdam, Netherlands
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:Industrial Engineering and Management BSc (56994)
Link to this item:http://purl.utwente.nl/essays/73024
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