tailieunhanh - The Impact of Interest Rate Shocks on the Performance of the Banking Sector

Customers who purchased caps are not included in the scope of the review unless they complain to their bank during the course of the independent review and are non-sophisticated customers. If the customer does complain, it will be considered in the same way as the other interest rate hedging products (except structured collars) category. However, if a customer complains after the independent review, their complaint will be dealt with in accordance with the banks’ usual complaints handling procedures. Previous complaints In most cases, those customers who have previously complained to their banks or the FOS will still be subject to this. | FEATURE ARTICLE The Impact of Interest Rate Shocks on the Performance of the Banking Sector by Wensheng Peng Kitty Lai Frank Leung and Chang Shu of the Research Department A rise in the Hong Kong dollar risk premium signified by a widening of the spread between Hong Kong dollar and US dollar interest rates would influence banks profitability mainly through its impact on i asset quality that affects provisioning charges and ii net interest margin. Empirical estimates on data from 1992-2002 show the net interest margin declined in response to increases in the risk premium because deposit interest rates were more sensitive to changes in the risk premium than the lending rate. A change in the domestic interest rate along with the US interest rate had little impact on the margin in the period under study. I. INTRODUCTION This article provides an assessment of how an increase in interest rates affects bank profits. For this purpose changes in Hong Kong dollar interest rates are decomposed into movements in the US interest rate and the spread over the US rate. The latter reflects the Hong Kong dollar risk premium which is determined by speculative pressures on the currency. There are different ways of considering the effects of interest rate changes on banks financial This article focuses on the empirical relationship between the market interest rate and banks net interest margin and the classified-loan ratio which determines charges for provisions .2 The latter two have been the main factors influencing bank profits. The article is organised as follows. The next section offers some observations on the profitability of the banking sector in recent years. It shows that the pre-tax return of retail banks in Hong Kong has been mainly driven by the net interest margin and the net charge for provisions. Section III provides estimates of the sensitivity of banks net interest margin to changes in interest rates and discusses how it is related to the pass-through of

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