Explanation:
According to studies on banking vulnerabilities, banks in emerging market economies (EMEs) typically hold a larger proportion of their assets in domestic government securities and have a lower reliance on long-duration fixed-rate loans (less structural maturity mismatch compared to advanced economies). Consequently, their primary vulnerability to interest rate changes stems from valuation losses on their substantial securities portfolios when interest rates rise.
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Q.42 The methods used by banks in emerging markets and advanced economies impact their vulnerabilities to interest rate changes. What vulnerability are EME banks particularly exposed to due to their approach to interest rate risk management?
A
Counterparty risks from extensive derivatives portfolios.
B
Maturity mismatches due to long-duration fixed assets.
C
Valuation losses from securities as interest rates fluctuate.
D
High operational costs due to frequent restructuring of loans.
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