Definition
Yield Curve Risk (Banking)
Yield curve risk is the exposure of a bank's earnings and bond portfolio to changes in the shape and level of the interest-rate yield curve.
Banks borrow short and lend long, so their NIM and the value of their G-Sec holdings depend on the yield curve. A steepening curve generally helps margins, while a flat or inverted curve squeezes them, and rising yields create mark-to-market losses on bond portfolios.
Indian banks manage this through the HTM, AFS and HFT classification of investments and through their asset-liability committee. Sharp moves in the 10-year G-Sec yield can swing treasury results and capital, making yield-curve management central to bank risk.
Related terms
- Held to Maturity (HTM)Held to Maturity is the bank investment category for securities intended to be held until they mature, valued at cost rather than market price.
- Asset-Liability MismatchAn asset-liability mismatch arises when the maturity or repricing profile of a lender's assets differs from that of its liabilities, creating liquidity or interest-rate risk.
- Treasury Income (Banking)Treasury income is the profit a bank earns from managing its investment portfolio, mainly gains and losses on government and corporate bonds and forex.
- Available for Sale (AFS)Available for Sale is the bank investment category for securities not held to maturity or for active trading, which are marked to market with changes routed through reserves.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.