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Bank Risk Exposure: the Time-varying Impact on Indian Commercial Banks
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Time’ and ‘value’ are the huge assets used by banks in risk management. This paper investigates the time-varying impact on the value of banks’ asset-liability positions to the macroeconomic fluctuations in the bank risk factors, such as interest rate risk, credit risk, foreign exchange risk, and equity risk. The value positions of 110 Indian commercial banks, including foreign banks, at various asset-liability maturity patterns are considered for measuring their position exposures. Results show that bank deposits, bank investments, and loans and advances are highly significant to all the risk factors, while decisions on bank borrowings and hedge policies are based on the internal regulatory requirements. Hence, they are significant only with the interest rate risk factor. Deposits with a maturity period of 15-28 days; 29 days to three months; and over three to six months have shown high sensitivity, which might indicate the risk averse nature of bank clients with immediate liquidity requirements. This indicates deteriorating credit conditions, signalling an increase in the probability of default, which decreases the economic value of the deposits. The same bank deposits with a highly negative significance to equity risk supports the portfolio rebalancing activities of clients, from illiquid low-return long-term investments to liquid high-return market portfolios, as hypothesised in recent banking literature. The study reports that maintaining a safe level of maturity management and predicting risk tolerance levels are the best ways for banks to devise proper risk management approaches.
Keywords
Bank Risk Exposure, Position Exposures, Maturity Pattern, Time-varying Impact, Corporate Risk Management
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