Real Interest Rate Risk in the Argentine Banking System. A Measuring Model
AbstractThe exposure of the Argentine banking system to real interest rate changes is material and discourages long term credit. Quantification of this risk would help to manage it and may promote new credit, although it is not an easy job, especially in emerging markets. This paper proposes a Value at Risk (VaR) approach that uses Monte Carlo simulation. We estimate time series models (autoregressive with mean reversion and jumps) of the behavior of bank deposits and of the rate of inflation, attempting to keep them tractable for a local practitioner. Results show that short term funded banks would face more risk from inflation indexed claims than from nominal claims (and would therefore apply a greater premium for that risk, according to a risk adjusted return on equity approach – RAROC). This can be linked to the discussion on the “puzzle” of the relatively low use of indexation. The extent of the risk and the fact that the sign of the gap is the same across banks does not contribute to the development of derivative contracts. Results may also indicate distortions introduced by capital requirement regulations and accounting rules. A generalization of the methodology may be explored within the framework of Pillar II of Basel II.
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Bibliographic InfoPaper provided by Central Bank of Argentina, Economic Research Department in its series BCRA Working Paper Series with number 200606.
Length: 41 pages
Date of creation: Dec 2006
Date of revision:
Argentina; Basel II; indexation; real interest rate risk; times series models; Value at Risk;
Other versions of this item:
- Verónica Balzarotti, 2007. "Real Interest Rate Risk in the Argentine Banking System. A Measuring Model," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(46), pages 7-61, January -.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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