Interest Rate Risk Management of Commercial Banks in Bangladesh Based on IS (Interest Sensitivity) GAP Analysis

Raad Mozib Lalon

doi:10.11648/j.ijefm.20170501.12

Abstract

This paper on the interest rate risk management of a bank will provide a detailed picture of risk management of bank because it is one of the concerned factors for every bank. This study will also indicate any shortfall of bank in terms of interest rate risk management and offer suitable recommendations. Interest rate risk is the exposure of a bank's financial condition to adverse movements in interest rates. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. However, excessive interest rate risk can pose a significant threat to a bank's earnings and capital base. Changes in interest rates affect a bank's earnings by changing its net interest income and the level of other interest sensitive income and operating expenses. Changes in interest rates also affect the underlying value of the bank's assets, liabilities, and off-balance-sheet (OBS) instruments because the present value of future cash flows (and in some cases, the cash flows themselves) change when interest rates change. Accordingly, an effective risk management process that maintains interest rate risk within prudent levels is essential to the safety and soundness of banks.

Highlights

Interest rate risk (IRR) is defined as the change in a bank’s portfolio value due to interest rate fluctuations
To know about the way how the bank progress in case of interest rate risk To know about the position of ABL (Agrani Bank Ltd) and PBL (Prime Bank Ltd) in interest rate GAP To know about the Net Interest Margin of ABL and PBL To analyze which factors the bank consider to minimize the risk To examine the last 8 years data to overlook its risk position To find out the relation among various factors which affect the risk To find out the sensitivity and mismatched maturity of
As the topic is 'Interest Rate Risk Management', so I have found out the Bank's net interest margin conditions over the last 8 years, Interest Sensitive Gap position of the bank, Relative IS Gap of the bank, Interest sensitivity ratio of the bank & the effects of interest rates change in the profit of the bank

Summary

Introduction

Interest rate risk (IRR) is defined as the change in a bank’s portfolio value due to interest rate fluctuations. It is the potential loss from unexpected changes in interest rates, which can significantly affect a bank’s profitability and market value of equity. The cost of funds increases more rapidly than the yield on assets. Interest rate fluctuation may have a negative impact on the economic and financial statement through assets, liabilities, and offbalance sheets positions related to interest rates. If the exposure is not managed properly it can reduce both the profitability and shareholder value

Objectives

Methods

Results

Discussion

Conclusion