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Abstract
The Basel Committee has released a consultative document (Basel (2003)) on the
management and supervision of interest rate risk (IRR). This document outlines a
standardised model to calculate a duration-based proxy for IRR in depository institution
balance sheets. We utilise this methodology to define an IRR measure which we denote
BIRRM (Basel Interest Rate Risk Measure). It is the change in the value of a financial
institution produced by a 200 basis-point increase in interest rates at all maturities,
relative to Tier I and Tier II capital.
This study has three primary objectives. Firstly, we utilise BIRRM to provide an
overview of IRR exposure of Australian Credit Unions and Building Societies (CUBS)
over the period September 1997 to September 2007. Secondly, we seek an
understanding of the relationship between BIRRM and measures of CUBS' interest rate
sensitivity over a period of rising interest rates (December 1998 to September 2000) and
another period of falling rates (September 2000 to December 2001). Finally, we seek an
understanding of the economic factors that influence IRR exposure decisions of CUBS
by modelling the determinants of CUBS' IRR exposure.
We find that IRR exposure of CUBS is relatively low and, on average, CUBS are
exposed to falling interest rates. We also find significant relationships between BIRRM
and measures of CUBS' interest rates sensitivity consistent with a priori expectations,
supporting the use of the Basel Committee's measure of IRR in identifying CUBS with large IRR exposures. The models examining the determinants of CUBS' IRR have
relatively low explanatory power. There are however significant relationships between a
number of factors and CUBS' exposure to changing rates.