Die Duration – eine geeignete Kennzahl für die Steuerung von Zinsänderungsrisiken in Kreditistituten? (Teil I)

Abstract

The Duration-Based Concept – A Meaningful Approach to Managing Banking Institutions’ Risk of Interest Changes? (Part I)

This is the first part of a contribution to be followed by another one in the 4/1989 edition of this publication that discusses the extent to which the duration-based concept in its net assets-related form is a meaningful approach to managing banking institutions’ risk of interest rate variations. This discussion is, however, no continuation of the theoretical assessment of that concept’s pros and cons. It rather attempts, with the help of a simulation model based on empirical interest rate data compiled for the period 1972/1986, to analyze the quality of various duration-based approaches to risk management. The simulation runs have produced a number of remarkable results: contrary to the wide-spread opinion, bankinginstitutions, for instance, that are characterized by fixed-interest lending surpluses neither run any risk in respect of their net interest income when interest rates go up nor do they have any opportunity in respect of the net interest they earn when interest rates go down. It is rather a fact that lending terms, much more volatile here than borrowing terms, lead to a much stronger response to market interest rate variations by interest earned compared to interest due in spite of the smaller volume of interest-variable assets. An analysis of results shows on the one hand that “net cash assets” as a management quantity are, since they are aimed at immediate hedging of net assets, inappropriate for managing net assets within the planning horizon. Moreover, the simulation runs based on the management quantity of “ultimate net assets” make it clear on the other hand that the assumption of uniform interest rate variations result in management mistakes of a dimension that are no longer acceptable. By taking account of maturity-specific yield fluctuations on the capital market, it has been possible to obtain management results that are – it is true – partially better, but in no way satisfactory overall. So, it should be noted as a major result that the description of changes in the behaviour of banks’ individual interest rates is indispensable to managing banking institutions’ interest rate variation risk. It will therefore be a matter of prominent importance in future to analyze the empirically ascertained behavioural changes in respect of anyone business position and to take account of the data obtained in managing position-specific interest rate variation risks.