The Mismatch Between Liability and Assets in Banking Regulation

In the current regulatory framework, we focus a lot on what we call pillar one. This is capital requirements that are supposed to cover for market risk, for credit risk, and for operational risk. Interestingly, they are not supposed to covers for interest rate risk, okay? Interest rate risk is also covered by regulation, but under pillar two,. So basically what the supervisors do in their, you know, day to day interaction with the banks, they try to see whether an increase in interest rates would be a problem for the bank.