

Asset Liability Management & Interest Rate Risk in the Banking Book - Part 4 of 4
21 snips Feb 13, 2025
In this engaging discussion, Eric Schaanning, an expert in asset-liability management from Credit Suisse and UBS, shares his wealth of knowledge on managing interest rate risk in the banking sector. He explains the importance of economic value of equity (EVE) and DV01, while highlighting different strategies like macro and micro hedging. The conversation also dives into innovations like reverse stress testing to identify vulnerabilities and the implications of interest rate fluctuations on banks' financial health, enlightening investors on evaluating risks in financial institutions.
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Interest Rate Mismatch Risk
- Interest rate risk arises from mismatches in repricing frequency between assets and liabilities.
- Fixed-rate loans with short-term floating-rate deposits create risk when short rates rise before loan rates reset.
Use Swaps to Hedge Risk
- Hedge interest rate risk by using interest rate swaps instead of match funding.
- Swaps let banks convert fixed payments to floating rates, creating synthetic match funding and locking in margins.
CCPs Guarantee Swaps
- Interest rate swaps are legally guaranteed by central counterparties like LCH to mitigate counterparty risk.
- These central clearinghouses manage the risk if one side fails and ensure contractual obligations are met.