Skip to content

CMA Final · Risk Management in Banking and Insurance · Interest Rate Risk Management

In the banking book, a bank funds long-term fixed-rate home loans with short-term deposits that reprice frequently. Which interest rate risk is the bank mainly exposed to?

The bank faces repricing risk. Its long-term fixed-rate assets reprice slowly while short-term deposits reprice quickly, making it liability sensitive, so rising rates increase funding cost faster than asset income and squeeze net interest income.

  1. ABasis risk arising from different benchmark indices
  2. BRepricing risk arising from a liability-sensitive mismatchCorrect
  3. CEmbedded option risk arising from prepayments only
  4. DYield curve risk arising only from a parallel shift in assets

Explanation

Long-term fixed-rate assets reprice slowly while short-term deposits reprice quickly, so the bank is liability sensitive. A rise in rates raises funding cost faster than asset yield, which is repricing (gap) risk. Basis risk concerns different benchmarks, which is not the main issue here.

Did you get it right without looking?

One question tells you little. A timed set on Interest Rate Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise Interest Rate Risk ManagementFree diagnostic mock

More Interest Rate Risk Management questions