Interest Rate Risk : Assessment and Management

Probability of loss to a bank’s earnings or equity on account of the movement of interest rates is termed as interest rate risk. Movement in the interest rates are driven by the liquidity and market situations and are also guided by monetary policy actions namely, changes in policy rates or special open market operations. Such changes impact the investment and asset-liability management of banks and hence, require the use of suitable tools and techniques for assessment and management of the risk. Techniques such as repricing gap computation, duration gap analysis, and convexity estimation are mostly used. Of late, the application of these techniques has been further expanded by more sophisticated methods such as key rate duration and principal component analysis. This article presents an insight into the subject and explains the use of these techniques