The Education of a Value Investor Asset Liability Management & Interest Rate Risk in the Banking Book - Part 2 of 4
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Nov 15, 2024 Eric Schaanning, a thought leader in financial risk management, joins Guy Spier to dissect the role of small treasury teams in managing significant banking risks. They tackle complex topics like yield curves and net interest income, relating them to personal finance strategies. The conversation also delves into Basel Committee scenarios for interest rate shocks and explores the implications for current banking models. Listeners will gain practical insights into asset liability management, bridging theoretical concepts to real-world financial navigation.
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Understanding Gap Risk
- Gap risk arises from mismatched timing between assets and liabilities in banks.
- Rising interest rates increase funding costs faster than asset returns, hurting profits.
The Challenge of Basis Risk
- Basis risk happens when assets and liabilities are priced on different interest rate indices.
- Differing movements in these indices create risk even if durations match.
NII vs EVE Metrics
- Net interest income (NII) measures nominal cash inflows minus outflows over 1-5 years.
- Economic value of equity (EVE) discounts all future cash flows, giving a present value balance sheet snapshot.
