Risk Assessment of Banks When Interest Rate Hikes

Faculty of Arts & Science, University of Toronto Mississauga, Toronto, ON M5S 3G3, Canada

^* Corresponding author: jialinjennie.li@mail.utoronto.ca

Abstract

In the era of global economic integration, the banking domain stands as a pivotal influence in determining a nation's economic health and stability. This piece explores the mounting significance of appraising banking hazards, especially in the face of the unparalleled obstacles brought forth by the COVID-19 pandemic. The international economic scenery has experienced significant transformations due to the pandemic, influencing economic endeavors, corporate earnings, and workforce dynamics. As a result, banks confront mounting credit, market, and liquidity risks, demanding strategic measures for operational stability. The essay focuses on assessing banking risks, with an emphasis on interest rate hikes, providing valuable insights for the industry's prudent development. It scrutinizes liquidity risk, highlighting challenges stemming from rising interest rates and urging diversification of funding sources and effective liquidity management. The credit risk landscape, influenced by pandemic-induced financial distress, increased defaults, and the need for enhanced risk management, is discussed. Additionally, the examination of market risk, particularly affected by interest rate hikes, explores fluctuations in asset prices and heightened volatility. The interplay of these risks during the COVID-19 pandemic emphasizes the necessity for banks to comprehensively strengthen their risk management strategies. The challenges associated with liquidity risk, including run risk, credit risk amid economic downturns, and market risk dynamics influenced by interest rate changes, are highlighted. The essay concludes by underscoring the substantial impact of the pandemic on the global economy, prompting the need for effective risk management strategies to ensure sustained operations and resilience in evolving market conditions.