CHAPTER 18
The Control of Interest-Rate Risk on the Banking Book, Part 1: The Earnings at Risk
As discussed in Chapter 4, one of the fundamental functions of banks is to help in the sharing of risks in the economy. For instance, depositors may prefer deposits denominated in euros, whereas a corporation may prefer to borrow in U.S. dollars. Or a depositor may prefer to have a variable-rate deposit, whereas a borrower prefers to raise funds on a fixed-rate basis. The offering of products that meet the needs of the market creates inherent risks of mismatching that are borne by the bank. Market risk refers to the impact of the movements of interest ...
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