Transformation of methods for assessing and managing the interest rate risk of the bank in the modern conditions

Abstract

The banking system has recently experienced a series of shocks that have extremely serious consequences. These challenges lead to the need for a rapid transformation of approaches to banking risk management, both for bank management and for regulatory bodies. Financial markets during such periods are highly unpredictable, which leads to an increase in the impact of market risks on the bank’s activities. One of the most important types of risks for banks due to the specifics of their activities as a financial intermediary is interest rate risk. Until the late 1960s, the capital market was characterized by relatively low and stable interest rates. The collapse of the Bretton Woods system and the strengthening of the positions of monetarism led to a more dynamic change in the market value of monetary resources. Money has come to be regarded more as a “specific” product, and the change in its market price affects the economic condition of a particular person in the same way as prices of goods, the state of the stock and currency markets. Approaches to the interpretation of interest rate risk by various authors have certain features. In the authors’ opinion, the interpretation of interest rate risk solely as the probability of losses can be transformed, taking into account the impact on an economic entity’s activity of shifts in supply and demand for a particular product (asset). At the same time, interest rate risk should be considered as a type of market risk. One of the most commonly used metrics for measuring the interest rate risk of financial performance deviations is dispersion. That is, the risk can have not only a negative, but also a positive impact on the financial condition of an economic entity. However, this should not be taken to mean that the risk management mechanism is not of great importance. At the moment, the range of methods used to assess and manage interest rate risk is not very wide. The methods include: GAP-analysis, duration method, Macauley method. They are widely used and successfully applied in banking practice. However, the methods of managing this group of risks require serious adaptation, taking into account modern realities. When risk materialization events occur, it is extremely difficult to assess the scale of the impact on the financial performance of the bank without modifications. In practice, this leads to the need to transform and supplement the considered management methods. As an addition to the main methods, according to the authors, the following can also be applied: NII (net interest income) dispersion method; method of transfer identification of the option component of interest rate risk; redundancy method; method of emulating management tools. The authors consider it expedient to expand the generally accepted methods by adding supplemental approaches to optimize the application of existing methods and also propose the use of correlation dependencies of financial markets as an alternative to traditional interest rate risk hedging tools in modern economic conditions.