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The Education of a Value Investor
Asset Liability Management & Interest Rate Risk in the Banking Book - Part 3 of 4
Nov 22, 2024
Eric Schaanning, an expert in asset liability management, joins Guy Spier to explore the intricacies of interest rate risk in banking. They discuss how interest rate fluctuations can significantly alter customer preferences, impacting deposit behaviors. Schaanning highlights the importance of behavioral modeling in assessing credit risk, revealing that changes in spending habits can signal financial distress. The conversation culminates with a shocking reminder that fixed-rate loans may turn perilous amid unexpected interest spikes, setting the stage for essential risk management strategies.
56:40
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Quick takeaways
- Banks must adeptly forecast customer deposit behaviors amid fluctuating interest rates to manage liquidity risk effectively.
- Interest rate changes significantly affect net interest income and economic value of equity, emphasizing the need for robust risk management strategies.
Deep dives
Understanding Basel Frameworks and Their Impact on Risk Management
The Basel Committee on Banking Supervision (BCBS) was established to respond to international banking crises, particularly after the failure of Herstatt Bank. Over the years, the Basel Accords (Basel I, II, and III) have evolved to introduce more sophisticated risk management strategies and minimum capital requirements for banks, addressing issues like liquidity risk. Basel I set a foundational capital requirement, while Basel II introduced a three-pillar framework that emphasized risk measurement and supervision. The ongoing development of Basel III seeks to enhance these regulations, particularly against the backdrop of financial crises that highlight the shortcomings of previous frameworks in handling liquidity risk.
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Discover
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Listen to the best highlights from the podcasts you love and dive into the full episode