THE FOREIGN CURRENCY LOANS AFFAIR: SOME COMMENTS

Kingston (1995) discusses the legal complications arising out of the foreign currency loans taken out in the middle eighties. This note discusses a number of points of difference within Kingston's interpretations. The most important example of these is the predictability of the losses arising from the loans. Some potential solutions of the problems identified by Kingston, and in this note, are also canvassed.     

REGULATION OF BANK INTEREST RATE RISK

This paper argues that the direct control approach to regulating bank interest rate risk is not the most effective one. First, a bank's interest rate exposure cannot be summarised in a single measure. Rather there are a number of such measures, depending on the target adopted, and it is not possible to determine all of them simultaneously. Basing a capital requirement on any one of these measures can have ‘unintended consequences' for the others. Secondly, changes in interest rates have a range of complex effects on banks and these effects cannot be incorporated in any single numerical measure of interest rate exposure. The paper also raises doubts about the usefulness of disclosure requirements as a tool of prudential regulation of bank interest rate risk management. The preferred approach is a supervisory regime which ensures that banks have in place an effective system for managing their own interest rate exposures. One aspect of this supervision must be to ensure that banks are using simulation analysis to measure the effect on them of changes in interest rates.