BANK COMPETITIVENESS IN THE FACE OF INTEREST RATE RISK

The values of assets and liabilities of financial institutions are subject to fluctuations in interest rate. The differential impact in interest rate changes between assets and liabilities is referred to, in banking, as interest rate risk. Of all threats to bank competitiveness this risk dwarfs all others. Banks traditionally have dealt with interest rate risk by restructuring their loan portfolios. In this paper, we construct a model to measure interest rate risk, called the Degree of Interest Rate Sensitivity (DIRS), and demonstrate its effectiveness for banks to compete. The degree of interest rate risk is of vital importance to the commercial bank which has to know its level and degree of interest‐rate risk in order to prudently manage it. Failure to adequately manage interest rate risk can lead to bankruptcy or, at the least, a lack of competitiveness.