Managing interest-rate risk in banking institutions

This paper develops and employs a multiperiod goal programming model to examine the normative effects of changing interest rates on the rearrangements of depository bank balance sheets and associated profits. A two-state rate preference framework allows a dynamic interpretation of the model’s prescribed decisions as well as a natural incorporation of profit sensitivity to interest-rate risk. The model includes on- and off-the-balance-sheet decision variables. Experimental results indicate that constraining the latter decision can seriously curtail the bank’s ability to achieve its profit objectives.