Two measures of interest rate risk

Most banks are equipped with two measures of interest rate risk.

Although finance specialists would rather focus on the economic value at risk as it represents the present value of all future cash flows, senior bankers also carefully consider the first measure (impact on the NIM) because of the attention paid by bank analysts to short-term profitability and return on equity (ROE).

It is advisable to monitor both measures of risk.

In pillar 2 of the Basel II capital regulation discussed in Stage 8, it is recommended that the economic value of equity at risk does not exceed 20% of BIS capital ...

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