Question

What is the commercial banks’ interest rates risk? ( 20 marks)

Explain how the commercial banks managed its interest rates risk. ( 30 marks )

Answer 1

1. Commercial bank interest rate risk means that risk which is arising out of the fluctuation in the interest rate in an economy.

Interest rate are often changed by monetary policies which are introduced by federal reserve in its meeting and these changes in interest rates are leading to change in the value of cash flows of various investment of these banks and these also lead to change in the earning of interest from loans so these interest rate change will always be posing a risk to the overall cash flow management of the bank and they will be keep on fluctuating so there is a need for management of interest rate risk in order to to proactively manage the cash flow of the bank to a large extent without getting impacted much by interest rate changes

2. Commercial bank managers its interest rate risk by-

A. Commercial bank will change the rate of interest on its loans and deposits in order to synchronise the receivables and payables

B. It will also try to adjust the new loans and new deposits according to the the freshly introduced interest rates

C.commercial bank will also be discounting various risk exposure into is cash flow management related to interest rate risk so that it is already discounted

D. It can choose to pass on to the interest rate risk to its consumers and depositors.