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CMA Final · Risk Management in Banking and Insurance · Introduction to Risk Management

A bank grants a 5-year fixed-rate loan funded by 3-month deposits. If deposit rates rise sharply after a few months, the bank's net interest margin shrinks. This exposure is best described as which type of risk?

This is interest rate risk caused by a repricing mismatch. The loan earns a fixed rate while the short-term deposits reprice quickly, so rising deposit rates increase funding cost and squeeze net interest margin. No borrower default is involved, so it is not credit risk.

  1. ACredit risk
  2. BInterest rate risk arising from repricing mismatchCorrect
  3. COperational risk
  4. DSovereign risk

Explanation

The loan rate is fixed while the funding reprices every three months, so a rise in deposit rates raises cost without raising income. This is a repricing (gap) mismatch, which is interest rate risk in the banking book. Credit risk is wrong because no borrower default or downgrade is involved.

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