Module: | MODULE B: RISK MANAGEMENT
Q282: Consider the following statements regarding the primary risks associated with the Banking Book:
1. Assets in the banking book are completely immune to interest rate risk because they are not subjected to daily mark-to-market valuation.
2. Credit risk is a primary risk in the banking book, arising from the potential default of borrowers on term loans and advances.
3. Interest Rate Risk in the Banking Book (IRRBB) can negatively impact both the Net Interest Income (NII) and the Economic Value of Equity (EVE) of a bank.
Which of the statements given above is/are correct?
2. Credit risk is a primary risk in the banking book, arising from the potential default of borrowers on term loans and advances.
3. Interest Rate Risk in the Banking Book (IRRBB) can negatively impact both the Net Interest Income (NII) and the Economic Value of Equity (EVE) of a bank.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is incorrect: While Banking Book assets avoid daily MTM accounting volatility, they are absolutely NOT immune to interest rate risk.
Structural mismatches between asset and liability repricing dates expose the bank to significant interest rate risk.
Statement 2 is correct: Credit Risk is the most dominant risk in the Banking Book, as the majority of this book consists of customer loans and advances subject to default or downgrade.
Statement 3 is correct: IRRBB is measured from two distinct perspectives: the earnings perspective, which measures short-term impacts on Net Interest Income (NII), and the economic value perspective, which measures long-term impacts on the Economic Value of Equity (EVE).
Structural mismatches between asset and liability repricing dates expose the bank to significant interest rate risk.
Statement 2 is correct: Credit Risk is the most dominant risk in the Banking Book, as the majority of this book consists of customer loans and advances subject to default or downgrade.
Statement 3 is correct: IRRBB is measured from two distinct perspectives: the earnings perspective, which measures short-term impacts on Net Interest Income (NII), and the economic value perspective, which measures long-term impacts on the Economic Value of Equity (EVE).