Risk Assessment of Banks When Interest Rate Hikes

Abstract

Interest rates play a crucial role in the risk management of banks. When central banks raise interest rates to curb inflation or an overheated economy, the risk profile of banks can alter significantly. This paper explores the risks banks face and their assessment methods in a rising interest rate environment, focusing on SVB and Credit Suisse as case studies. It identifies key risks such as liquidity risk, credit risk, market risk, and systemic risk by examining the impact of increasing interest rates on banks' balance sheets, earnings, and capital positions. The research concludes that Asset-Liability Management (ALM) modeling, stress testing, and hedging strategies are effective tools for banks to manage these risks. A thorough literature review underscores the importance of these strategies in ensuring banks' stability and performance amidst rising interest rates. The paper highlights that proper risk management practices are essential for banks to navigate the challenges posed by changing interest rates and to maintain their financial health and operational stability in such an environment.