Banking Risk Management in a Globalizing Economy

By Panos Angelopoulos; Panos Mourdoukoutas | Go to book overview

6

Interest Rate Risk Management

Banks use derivative products mainly to manage interest rate
risk; the increased volatility of interest rates has made the need
for accurate measurement and control of interest rate risk par-
ticularly acute.

Katerina Simons (1995, 24)

In the late 1980s, economists at the Olympic Bank, a major Greek bank, grew concerned about another problem, the rising government deficits and the prospect of higher short-term, medium-term, and long-term interest rates, which, if materialized, could have a negative impact on both the bank balance sheet and operations statement. In particular, bank economists were concerned about a large portion of the bank's fixed rate portfolio financed by floating rate funds borrowed in the interbank market.

Olympic Bank is not alone. In a deregulated economy, every bank and every financial institution is concerned with interest rate fluctuations. Higher interest rates, for instance, have a negative impact on banks as borrowers of funds at floating rates, such as money market accounts, short maturity CDs, banker's acceptances. In

-109-

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Banking Risk Management in a Globalizing Economy
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Figures and Tables ix
  • 1: Introduction: from Financial Intermediation to Risk Management 1
  • 2: Banking Risk Management: an Overview 11
  • 3: Evolution of Banking Risk Management 51
  • 4: Risk Management Methods: Financial Derivatives 73
  • 5: Credit Risk Management 97
  • 6: Interest Rate Risk Management 109
  • 7: Foreign Exchange Risk Management 135
  • 8: Conclusion 155
  • References 163
  • Index 169
  • About the Authors 172
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