Setting Limits: Interest Rate Risk Management
Interest Rate Risk
Repricing limits are set for interest rate management. These limits control exposure by controlling the volume or amount of securities that are repriced in a given time period. By staggering the repricing of the securities the company can reduce the volatility as well as control the degrees of sensitivity in the asset and liability portfolios.
Limits are often expressed as the ratio of rate sensitive assets (RSA) to rate sensitive liabilities (RSL) in a given time period. A ratio greater than one suggests that the company is asset sensitive and has more assets than liabilities subject to repricing. All factors remaining constant, the earning for the company will be reduced by falling interest rates. An RSA/RSL ratio less than one on the other hand suggests that the company is liability sensitive and its earnings may be reduced by increasing interest rates.
Other gap limits to control exposure include gap to asset ratios, gap to equity ratios and absolute limits on the net gap.