Is Kudlow Wrong?: What the Yield Curve tells the Smart Investor
Does the Yield Curve Forecast Mini-Boom?
How Exposed is Your Bank?
Which financial institutions are most exposed to interest rate risk? When analyzing financial insitutions, pay close attention to Duration of Equity which looks at both sides of the balance sheet as if they were bonds and measuring their IR risk. Any bank worth its salt will know this number and any analyst worth his/her salt will know to look for it. Furthermore, analysts looking at banks need to understand the derivatives. Banks balance sheet can be quite deceiving as they can swap out their longer term deposits in exchange for floating in a plain vanilla IR swap. At GMAC, they swapped 1.5BB of longer term assets into 3 month floating. If short term rates remained low, it translated to 100MM in Net Income, but the risk they took could have caused them to lose the same amount.
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