IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v27y2024i03n04ns0219024924500018.html
   My bibliography  Save this article

Systemic Perspective Of Term Risk In Bank Funding Markets

Author

Listed:
  • ANDREA MACRINA

    (Department of Mathematics, University College London (UCL), Gower Street, London WC1E 6BT, UK2African Institute for Financial Markets and Risk Management (AIFMRM), University of Cape Town (UCT), Private Bag X3, Rondebosch 7701, South Africa)

  • OBEID MAHOMED

    (African Institute for Financial Markets and Risk Management (AIFMRM), University of Cape Town (UCT), Private Bag X3, Rondebosch 7701, South Africa)

Abstract

The transition from term-based reference rates to overnight reference rates has created a dislocation in the market-making processes between the interbank and non-interbank funding, and their respective derivatives markets. This dislocation can be attributed to differences in funding and corresponding interest rate swap transactions, a thesis we explain and characterize in detail. It is then shown how this dislocation may be resolved. Based on a systemic perspective of a stylized financial system, an aggregated banking system is constructed that is void of idiosyncratic credit risks but still vulnerable to liquidity risks. Within this setup, a mathematical modeling framework for term-cognizant interest rate systems is derived that enables the pricing and valuation of bank term funding and associated derivatives transactions with varying liquidity characteristics. Other outcomes include: (i) a detailed analysis of the incomplete market paradigm that encapsulates bank term funding rates and the risk management processes involved therein; and (ii) a recovery of consistency in the pricing and valuation between funding and related interest rate swap transactions, along with a mechanism to exchange term risk.

Suggested Citation

  • Andrea Macrina & Obeid Mahomed, 2024. "Systemic Perspective Of Term Risk In Bank Funding Markets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 27(03n04), pages 1-55, May.
    • Handle: RePEc:wsi:ijtafx:v:27:y:2024:i:03n04:n:s0219024924500018
    DOI: 10.1142/S0219024924500018
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024924500018
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024924500018?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:27:y:2024:i:03n04:n:s0219024924500018. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.