Introduction** Liquidity risk represents a critical concern for banks, referring to the risk of being unable to meet financial obligations as they fall due, without incurring unacceptable losses or damage to reputation. Sound liquidity risk management ensures a bank’s ability to fund increases in assets and meet obligations as they come due, even under stressed…
Effective management of interest rate risk (IRR) is vital to the stability and soundness of banking institutions. Banks must adopt a comprehensive risk management framework that systematically identifies, measures, monitors, and controls IRR exposures. The Basel Committee on Banking Supervision (BCBS), as the principal global standard setter for prudential regulation in banking, has issued a…
Interest rate risk can significantly affect the financial performance of institutions and borrowers. To manage and mitigate this risk, various hedging strategies are employed, primarily through the use of derivative instruments. The most commonly used derivatives include interest rate swaps, options, futures, and forward rate agreements (FRAs). Interest Rate Swaps An interest rate swap is…
Introduction Interest rate risk (IRR) refers to the potential adverse impact on a bank’s financial performance and economic value resulting from fluctuations in market interest rates. Such risk primarily affects a bank’s net interest income (NII) and the valuation of its financial assets and liabilities. Effective IRR management is essential for safeguarding both short-term profitability…
Introduction Interest rate risk (IRR) refers to the potential decline in the value of financial assets—primarily bonds—due to unexpected changes in interest rates. For banks, managing IRR is critical to ensuring financial stability, profitability, and compliance with regulatory standards. Effective IRR management aims to maintain a bank’s risk exposure within acceptable limits across a range…
**Introduction** Liquidity risk represents a critical concern for banks, referring to the risk of being unable to meet financial obligations as they fall due, without incurring unacceptable losses or damage to reputation. Sound liquidity risk management ensures a bank’s ability to fund increases in assets and meet obligations as they come due, even under stressed…
Introduction Liquidity risk arises when a bank is unable to meet its financial obligations as they become due, thereby adversely affecting its financial stability. Effective liquidity risk management ensures that a bank maintains adequate funds to meet its obligations in a timely manner, thereby minimizing the likelihood of financial distress. This is particularly important because…
Definition and ImportanceLiquidity management refers to the strategic process by which an organization, particularly a financial institution, ensures the availability of sufficient cash or easily convertible liquid assets to meet its short-term financial obligations. This involves maintaining an optimal balance between holding enough cash to manage day-to-day operations and maximizing returns on surplus funds through…
Overview:Asset classification refers to the process by which banks and financial institutions categorize their loans and advances based on the level of credit risk and potential default. This classification is crucial for determining appropriate provisioning—i.e., the amount banks must set aside from their profits to cover potential loan losses. Adequate provisioning ensures financial stability and…
The Basel framework—comprising Basel I, Basel II, and Basel III—establishes international standards for banking regulation, with a primary focus on capital adequacy, risk management, and market discipline. This framework is structured around three mutually reinforcing pillars, designed to promote the safety and soundness of the global banking system. Scope of Application Pillar 1: Minimum Capital…