BAS September 2022 Presentations

APPENDIX A - DEFINITION AND TYPES OF INTEREST RATE RISK A PENDIX C: Asset Sensitive vs. Liability Sensitive

Liability Sensitive  Assets longer‐term  than liabilities 

Asset Sensitive  Assets shorter‐term  than liabilities 

         Rates

         Rates

         Rates

         Rates 

NIM improves  Asset yields increase  more than funding costs 

NIM declines  Asset yields decrease  more than funding costs 

NIM declines  Funding costs rise more  than asset yields 

NIM improves  Funding costs fall more  than asset yields

Evaluating the term structure of the balance sheet:   Federal Funds sold are immediately re‐priceable, and interest‐bearing bank balances are typically short‐term.   The loan portfolio typically has a shorter duration than the investment portfolio.  Therefore, banks with large bond portfolios tend to  have a longer‐term asset structure. 

 Consider the impact of optionality (e.g. mortgage loan prepayments and callable bonds).   A large and stable core deposit base allows for greater pricing flexibility and mitigates risk. 

 While banks have less control over the cost of wholesale funding (e.g. brokered and listing service deposits, borrowings), these can help  offset risk exposure due to the ability to select specific desired maturities (e.g. obtain long‐term borrowings to match long‐term assets).