Interest Rate Risk Management In The New Zealand Banking System
The recent high-profile collapse of Silicon Valley Bank in America has highlighted the importance of effectively managing interest rate risk, especially in a rising interest rate environment.
Interest rate risk is caused by fluctuations in the value of banks’ assets and liabilities as interest rates change. This can expose banks to losses and impact their capital positions.
New Zealand banks have relatively little interest rate risk. They manage this risk by matching the repricing profile of their assets and liabilities, and by using financial products to hedge any differences. They are also required to hold sufficient capital to cover potential losses arising from any remaining interest rate risk, which incentivises banks to carefully manage the risk.
This is important as Silicon Valley Bank highlights how quickly concerns over risk management can undermine depositor confidence in an entity and the banking system as a whole. This can potentially lead to increased deposit outflows, and in extreme scenarios, can contribute to a bank run.
We explore this further in an excerpt from our May 2023 Financial Stability Report that we are pre-releasing today. Our full Financial Stability Report will be published on Wednesday 3 May.