Is tilting the securities portfolio the only way for a bank to manage interest rate risk ? For example, when adding longer term mortgage loans increases duration (and risk) to asset side of balance sheet. Mental blank also, if the loan portfolio is an asset what are banks’ liabilities typically ?
-bank’s liab are customer and institutional deposits
Derivatives. Lots and lots of derivatives. Banks also borrow themselves in short term markets along with the above listing of liabilities.
what do you mean borrow themselves Big?
They will actually have credit facilities with other financial institutions. In alot of markets banks will not be able to collect enough deposits to fund the demand for loans from members. To offset that difference they will have to engage in borrowing themselves (leverage) to fund that difference. And in some markets the demand for loans will be significantly more than the bank can fund from either deposits and borrowings themselves, so they end up selling off a bunch of the loans they have funded (securitization).
thank you that helps clarify.
Good point BB - issuance of money market securities by bank, such as CDs & CP etc, is effectively borrowing