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REGULATION OF BANK INTEREST RATE RISK
Author(s) -
VALENTINE TOM
Publication year - 1997
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/j.1467-8454.1997.tb00818.x
Subject(s) - interest rate , interest rate risk , measure (data warehouse) , unintended consequences , net interest margin , capital requirement , economics , bank regulation , business , actuarial science , capital adequacy ratio , risk analysis (engineering) , monetary economics , computer science , microeconomics , incentive , database , law , political science
This paper argues that the direct control approach to regulating bank interest rate risk is not the most effective one. First, a bank's interest rate exposure cannot be summarised in a single measure. Rather there are a number of such measures, depending on the target adopted, and it is not possible to determine all of them simultaneously. Basing a capital requirement on any one of these measures can have ‘unintended consequences' for the others. Secondly, changes in interest rates have a range of complex effects on banks and these effects cannot be incorporated in any single numerical measure of interest rate exposure. The paper also raises doubts about the usefulness of disclosure requirements as a tool of prudential regulation of bank interest rate risk management. The preferred approach is a supervisory regime which ensures that banks have in place an effective system for managing their own interest rate exposures. One aspect of this supervision must be to ensure that banks are using simulation analysis to measure the effect on them of changes in interest rates.