📝 One-liners · 121 cards
Liquidity Management
Define Interest Rate Risk (IRR) in banking.
Exposure of a bank's financial condition to adverse movements in interest rates affecting earnings and capital.
What are the two distinct ways interest rate changes affect banks?
Earnings effect (NII/NIM change) and Value effect (present value of cash flows change).
Why is maturity mismatch dangerous for banks?
Rising rates cause asset values to fall more than liabilities, exposing bank to economic loss and insolvency risk.
Define Gap (Mismatch) Risk.
Risk from holding assets and liabilities with different principal amounts, maturity dates or repricing dates.
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