In this conversation between Guy Spier and Eric Schaanning, the discussion revolves around the intricacies of asset-liability management (ALM) and interest rate risk, particularly in the banking sector. Eric shares insights from his experience, explaining key concepts like the economic value of equity (EVE), DV01 (the sensitivity of a bank's net present value to interest rate changes), and various risk management techniques used by banks.

The conversation explores how different banks, depending on their lending structures (e.g., fixed-rate vs. floating-rate loans), manage interest rate risk. Eric discusses the role of macro and micro hedging, highlighting that while macro hedging is used to offset risks from a portfolio of loans, micro hedging targets individual debt issuance with specific interest rate swaps. The conversation also touches on the concept of "equity term out," referring to how a bank's equity is handled from an interest rate risk perspective.

Guy draws a parallel to value investing and mentions how understanding banking risk management, such as interest rate risk, is valuable for investors, especially when evaluating financial institutions. He mentions the importance of having a clear understanding of how these risks could impact stock prices and the economic health of banks.

The discussion ends with reflections on how understanding these concepts can enhance an investor's decision-making, particularly in evaluating the risks and opportunities in the banking sector. Eric emphasizes the importance of thinking about balance sheets over time and how these insights apply not only to banks but also to individuals managing their own finances. Finally, Eric shares resources like LinkedIn and his personal Google site for further learning.

Full transcript available here: https://aqfd.docsend.com/view/9mdatutavitmigp6

Here's a link to the presentation: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5007032

Contents:

(00:00:00) Managing Interest Rate Risk: Gap Profiles, Match Funding & Interest Rate Swaps

(00:08:28) Central Clearing, Interest Rate Swaps, and Deposit Risk Management

(00:19:00) Understanding Key Rate Duration and DV01: Measuring interest Rate Risk

(00:30:14) How Banks Hedge Interest Rate Risk: A Deep Dive into Economic Value Manage

(00:38:22) How Banks Manage Interest Rare Risks (and What Can Go Wrong)

(00:51:52) Interest Rate Risk in Banking: Lessons for Investors and Managers