The Interest Rate Risk of Mortgage Loan Portfolio of Banks

Transcription

1 The Ineres Rae Risk of Morgage Loan Porfolio of Banks A Case Sudy of he Hong Kong Marke Jim Wong Hong Kong Moneary Auhoriy Paper presened a he Exper Forum on Advanced Techniques on Sress Tesing: Applicaions for Supervisors Hosed by he Inernaional Moneary Fund Washingon, DC May 2-3, 26 The views expressed in his paper are hose of he auhor(s) only, and he presence of hem, or of links o hem, on he IMF websie does no imply ha he IMF, is Execuive Board, or is managemen endorses or shares he views expressed in he paper.

2 The Ineres Rae Risk of Morgage Loan Porfolio of Banks A Case Sudy of he Hong Kong Marke Jim Wong Marke Research Division Hong Kong Moneary Auhoriy May 26

3 Conen Marke and Ineres Rae Srucures Ineres Rae Risk Sress-esing Framework and Model Scenario Analysis 3

4 Morgage Marke in Hong Kong Primarily adjusable rae morgages, wih pricing mainly referenced o prime rae (P) The cos of fund is deermined by a mix of ineres raes Dominaed by major reail banks - no only by marke shares - also by price seing 4

5 Ineres Rae Srucure of Hong Kong Under he Linked Exchange Rae sysem, ineres raes in Hong Kong end o rack closely heir US counerpars Major local ineres raes are: - Prime rae (P, his is also named as he bes lending rae) - Savings deposi rae (SR) - Inerbank raes (HIBORs) - Time deposi raes (TDRs) - Ohers (such as ineres raes on negoiable cerificaes of deposi and deb insrumens) 5

6 Prime rae Se by major reail banks and followed by oher banks normally adjuss when here is a change in he US Federal funds arge rae (FFTR), or when pressures from changes in he cos of funds are buil up o a cerain level % p.a monh LIBOR Average P 4 FFTR 2 Jan-97 Jan-98 Jan-99 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 6

7 % p.a. 12 Savings deposi rae Normally adjuss in andem wih P Tradiional pracice, no required by regulaion Average P 4 2 Average SR Jan-97 Jan-98 Jan-99 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 7

8 Inerbank raes Normally rack closely US ineres raes, bu may deviae from he US raes wih a risk premium due o liquidiy condiions and oher facors % p.a monh HIBOR 3-monh LIBOR Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-1 Jan-3 Jan-5 8

9 Risk premium HIBOR minus LIBOR Shor-erm deviaions in ineres raes of he Hong Kong dollar over he US dollar. The mean level over he pas 17 years is close o zero Bps Risk Premium % confidence band Hisorical mean -3 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-1 Jan-3 Jan-5 9

10 Reasons for he narrowing of spread Balance shee posiions of banks Fixed-rae asses Asses Variable-rae asses (mosly HIBOR-based lending) P-based asses (largely priced wih reference o P) Non-ineres bearing asses (such as equipmen and buildings) Fixed-rae liabiliies Liabiliies Variable-rae liabiliies (mosly HIBOR-based borrowings) P-based liabiliies (largely savings deposis, he ineres raes of which move in andem wih he P) Non-ineres bearing liabiliies (mainly demand deposis and capial) 1

11 % p.a P + 1% Average P 4 2 Weighed average morgage rae P - 3% Jan-97 Jan-98 Jan-99 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 11

12 This was made possible by he exraordinary low funding cos wih he HIBOR being a an usually deep discoun o LIBOR of 2 bps. % p.a monh HIBOR 1 3-monh LIBOR bps 2 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-1 Jan-3 Jan-5 12

13 Sress-esing framework and model An error correcion model is esablished o examine how P and oher ineres raes may move in response o changes in FFTR (and LIBOR) and risk premium. Wih he esimaion resuls, we could sress es and assess he poenial impac on ineres margin of banks exising morgage porfolio under an ineres rae shock of a possible sharp reversal of he risk premium. 13

14 Sress-esing framework and model Model specificaion: P = α DS1 + e (1) + α1r 1 + X + α 2 where X is Observaions wih X φ1 FFTR = φ 3 FFTR wih φ FFTR 2 + φ FFTR 4 + φ + φ M 5 l= M 7 l= prem prem + l + l + φ + φ M 6 l= M 8 l= prem prem l l when P - based L/A raio 1 Observaions wih P - based L/A raio< 1 (2) R P β1 = FFTR (3) 14

15 Sress-esing framework and model The error correcion model sudies he siuaions (oal 4 siuaions) : FFTR/Risk Premium are increasing or decreasing P-based L/A raio is greaer han or less han 1 15

16 Sress-esing framework and model Esimaion Resuls Dependen Variable : P Jan 95-Jan 5 Seleced Variable Coefficien Shor run (1) A R * L/A raio 1 + prem.12 ** prem.54 ** + FFTR.16 * FFTR.74 *** Long run (2) FFTR.89 *** Adj. R-squared.69 Q(6) Q(12) DW

17 Scenario analysis The scenario ha he risk premium increases by 2 bps (back o is hisorical mean level), while US ineres raes remain unchanged, is examined. The effecs in hree monhs ime are as below: Risk Premium Reversal of 2 bps (back o he mean level) Changes (bps) P +24 HIBOR +2 Ineres Margin (P HIBOR)

18 Scenario analysis The impacs on ne ineres margin of HIBOR-based morgage loans priced in January 25 are simulaed. Risk Premium Reversal of 2 bps (back o he mean level) Morgage Pricing 2 Funding Cos -65 Curren Gross Morgage Margin 135 Operaing Cos -3 Credi Cos -1 Curren Ne Morgage Margin 95 Esimaed Reducion of Morgage Margin -176 Simulaed Ne Morgage Margin Afer Impac