TAILIEUCHUNG - INTEREST RATE RISK MANAGEMENT AT TENTH DISTRICT BANKS

Recent experience illustrates this point. Consider the fact that the Fed cut interest rates sharply in response to two of the most serious financial crises in recent years: the October 1987 stock market break and the turmoil following the Russian default in 1998. Arguably, in retrospect, interest rate policy remained too easy for too long in both cases. The latitude to increase bank reserves independently of interest rate policy conceivably could have enabled the Fed to stabilize financial markets in those cases with less risk of stimulating the overall economy excessively. To some degree, the Fed can already manage broad. | Interest Rate Risk Management At Tenth District Banks By Karlyn Mitchell o The higher level and volatility of interest rates since the mid-1970s have substantially complicated the management of financial portfolios for investors borrowers and institutions. Commercial banks have been particularly affected because financial intermediation borrowing from savers and lending to borrowers is still the main source of their profits. Higher interest rate levels increase the potential loss from poor portfolio management while greater interest volatility increases the effort needed for successful management. Greater interest rate risk is largely responsible for the emergence of asset-liability management at commercial banks a management strategy focused on controlling interest rate risk. This article finds that most banks in the Tenth Federal Reserve District have been slow to adopt techniques for controlling interest rate risk. As a result district banks remained Karlyn Mitchell is a senior economist in the Economic Research Department at the Federal Reserve Bank of Kansas City. John E. Young a research associate in the Economic Research Department provided research assistance. exposed to interest rate risk during the 1976-83 period although their exposure was significantly reduced by the end of 1983. It is argued that bankers should strive to broaden their range of risk management techniques to be viable in the more competitive environment of the future. The article first discusses the problems interest rate risk pose for bank portfolio management and gives an overview of techniques that have been developed for hedging against interest rate risk. The article then examines the experience of Tenth District banks in applying these techniques. Asset-liability management and interest rate risk Asset-liability management was developed in the mid-1970s as a means of maintaining bank performance in the face of high and volatile interest rates. The objective of asset-liability .

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