Abstract
M.Com. (Business Economics)
By paying more attention to the risks associated with funding, banks will be able to fund themselves more effectively. Of especial importance are liquidity and interest rate risk because of the perceived trade-off that exists between them. This complicates the
funding of a bank. To manage the liquidity and interest rate risks effectively requires a
comprehensive analysis to ensure that they are properly understood. The causes, origins, inter-relationships with other risks and the measurement of risk are investigated thoroughly. The management of these risks is then examined. With regard to risk management, it is especially important not to focus on anyone risk in isolation, but to manage the multiple risk profile bearing in mind their interrelationships. All the risks a bank is exposed to are ultimately reflected in capital risk. Stringent capital requirements are imposed upon banks and these are being phased in over the period to 1995. Consequently capital risk is also investigated. The relationship that exists between liquidity risk and interest rate risk is investigated. Ways and means to separate these two risks are examined to try and manage them separately. In this way each of these two risks can be managed within acceptable norms. To achieve this
goal, the use of the traditional funding instruments, modified funding instruments and derivatives are examined. Each of these are investigated and applied to the funding of a bank. The yield curve is investigated as one of the ways to explain the term
structure of interest rates. The different types of yield curves and the meaning of each are dealt with. Thereafter the use of yield curve analyses in forecasting interest rates is assessed with a view to formulating an optimal funding strategy. An asset and liability model was used during the analysis of liquidity risk, interest rate risk and the yield curve.