CHAPTER 4 Major Risks Faced by Banks

“Bets on the directions of interest rates are like the little girl from the nursery rhyme with the curl on her forehead. When they are good, they can be very, very good, but when they are bad, as NCNB Corp. is now finding out, they can be horrid.”

Kelley Holland: American Banker, March 20, 1990

Glossary of Terms

OTS: Office of Thrift Supervision. This is a national regulatory agency for the thrift industry.

Zero-coupon bonds: Bonds that pay no coupon, so that the entire repayment to bondholders is at maturity.

Immunization: The act of insulating the institution from interest rate risk.

Going Long: Purchasing a security.

Going Short: Selling a security without owning it.

Introduction

Risk is endemic ...

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