Internal Yield Curves: Visualizing Net Interest Margin

Summary

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During the almost 30 years The Baker Group has helped community banks manage their interest rate risk and investment portfolios, we have noticed that one of the shortcomings of many asset/liability management models is the simplistic assumption that interest rates all move together in parallel fashion. Many "rate shock" simulations are at times both inadequate and misleading since they make no provision for flattening and/or steepening of the yield curve. Perhaps the best way to visualize the risks to net interest margin is to look at each bank's unique internal yield curves. A bank's internal rates include yields on earning assets and the rates paid on deposits. It is the behavior of these internal rates that determine the bank's net interest margin, and they certainly don't move in tandem with the market or each other. The various earning assets and paying liabilities will have different sensitivities to changes in market rates.

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Internal Yield Curves: Visualizing Net Interest Margin

During the almost 30 years The Baker Group has helped community banks manage their interest rate risk and investment portfolios, we have noticed that one of the shortcomings of many asset/liability management models is the simplisti...

See the full content of this document

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