Managing Market Risk in the Investment Portfolio

While risk factors vary by type and magnitude from bank to bank, market risk is a universal consideration for all portfolios. Given its broad relevance, this article explores the management of market risk in greater detail. Market risk refers to the sensitivity of the portfolio's market value t...

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Bibliographic Details
Published in:Community Banker 2007-08, Vol.16 (8), p.54
Main Authors: DeMasi, Jim, Clarke, James J
Format: Article
Language:English
Subjects:
Balance sheets
Bank portfolios
Banking industry
Banks
Cash flow
Community banks
Derivatives
Enterprise risk management
Hedging
Interest rates
Investment policy
Liability
Profits
Risk assessment
Risk exposure
Third party
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Summary:While risk factors vary by type and magnitude from bank to bank, market risk is a universal consideration for all portfolios. Given its broad relevance, this article explores the management of market risk in greater detail. Market risk refers to the sensitivity of the portfolio's market value to changes in key variables such as interest rates, volatility, and credit spreads. A robust enterprise risk management program should include an effective process for addressing the market risk that arises from a bank's investment activities. Once market risk has been accurately measured, strategies should be developed for maintaining risk levels within policy limits. For many institutions, the investment portfolio is used to balance the risk exposure that emanates from customer-driven business lines such as lending and deposit taking. In addition to the more traditional asset/liability matching approaches, derivative instruments can be useful risk management tools.
ISSN:1529-1332