Banking · Interest Rate Risk in Banking Book
In financial risk management, 'Basis Risk' is identified as a distinct component of Interest Rate Risk in the Banking Book (IRRBB). Basis risk primarily occurs when:
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- 1borrowers utilize their right to pay off their loans earlier than the scheduled maturity date in response to falling interest rates.
- 2the institution faces a liquidity squeeze due to an unexpected surge in the withdrawal of demand deposits.
- 3interest rates for different financial instruments change by different magnitudes or speeds, despite having similar repricing characteristics.✓
- 4there is a temporal mismatch in the maturity or repricing of assets, liabilities, and off-balance sheet positions.
Correct answer
interest rates for different financial instruments change by different magnitudes or speeds, despite having similar repricing characteristics.
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