The Education of a Value Investor Asset Liability Management & Interest Rate Risk in the Banking Book - Part 1 of 4
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Nov 1, 2024 Eric Schaanning, an expert in financial risk management with notable leadership roles at Nordea, UBS, and Credit Suisse, dives into the intricacies of Asset Liability Management (ALM) and Interest Rate Risk in banks. He discusses how recent banking crises highlight the need for effective risk measurement strategies. Insights from case studies reveal the importance of liquidity management and the impact of interest rate fluctuations on financial stability. Schaanning also explores the challenges posed by low interest rates and regulatory frameworks affecting banking practices.
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SVB's Interest Rate Risk Collapse
- Silicon Valley Bank failed due to unhedged interest rate risk on long-term securities funded by short-term deposits.
- Rising rates caused unrealized losses, insolvency, and a depositor run that forced regulators to intervene.
Behavioral Option Risk Explained
- Bank deposits contractually allow immediate withdrawal but behave as if they have a modeled duration.
- This behavioral option risk requires banks to model deposit stickiness despite customers' right to withdraw anytime.
Banks Create Money, Not Just Intermedia
- Banks create money when issuing loans, not relying solely on existing deposits or bonds.
- This challenges the classic view that banks only intermediate depositor savings to borrowers.