University of Twente Student Theses

Login

The impact of interest rate risk-taking on a bank’s profitability : a new dimension to balance sheet improvement

Roebers, T. (2017) The impact of interest rate risk-taking on a bank’s profitability : a new dimension to balance sheet improvement.

[img]
Preview
PDF
965kB
Abstract:With term premia present in the yield curve, banks have incentives to create mismatches between term structures of cash flows and with this, expose themselves to interest rate risk. We examine the impact of a bank's interest rate risk appetite on its return on equity, as well as give insight in the impact of a direct capital charge for IRRBB. We do this by creating a model that reallocates the exposures to balance sheet items. Our model is a stylized reflection of an average, small Dutch bank and optimizes the return on equity of a bank while being subject to interest rate risk, liquidity and capital constraints originating from the Basel accords. In order to provide a precise calculation of the interest rate measures, the balance sheet items are allocated to detailed subclasses based on fixed interest rate periods. We quantify IRRBB by the change in net interest income (NII) and the change in economic value of equity (EVE) resulting from a set of alternative interest rate scenarios. Furthermore, banking instruments are subject are subject to optionality, creating uncertainties in future cash flows. We analyze the impact of changes in two sources of optionality embedded in banking instruments on a bank's interest rate risk exposure.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:Industrial Engineering and Management MSc (60029)
Link to this item:http://purl.utwente.nl/essays/72380
Export this item as:BibTeX
EndNote
HTML Citation
Reference Manager

 

Repository Staff Only: item control page