This paper attempts to reveal how the commercial banks operating in Bangladesh have measured interest rate risk using Interest sensitivity analysis along with considering the impact of key factors affecting the profitability measured with Net interest margin of banks under Bank specific as well as macro-economic environment. Interest sensitivity (IS) GAP analysis has been deployed to measure the degree of interest rate risk followed by a panel data regression model considering a comparative analysis among fixed effect within group, random effect GLS and Pooled OLS method adopted to measure the causation between Net interest margin and Bank specific along with Macroeconomic factor to accomplish the objective of this paper. In IS GAP along with relative IS GAP analysis, two banks are found to be liability sensitive posing a risk of reducing the net interest margin (NIM) if interest rate has been increased and rest of the banks are found to be asset sensitive again postulating risk of reducing the NIM if market rate interest has been decreased considering the ten years’ data regarding rate sensitive assets (RSA) and rate sensitive liabilities (RSL) of four commercial banks selected using convenience sampling approach. Moreover, Panel Data regression model depicts how several key factors such as degree of risk aversion, credit risk and quality of management, Average operating cost, size of banks, implicit interest payments may significantly affect this NIM ratio measuring the profitability of banks in Bangladesh followed by several diagnostic tests such as model specification test using hausman & LM test, multicollinearity test, heteroscadisticy test and unit root test conducted to check the validity of models.
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