The different valuation methods of banking book positions are resulting in undesired fluctuations of the P&L result. IAS 39 provided a framework (hedge accounting) to deal with and offset these P&L result fluctuations. However, the strict rules for hedge accounting often limited the implementation of appropriate hedging strategies. With the new standard IFRS 9, [...]
The increasing credit spread volatility as a result of increasing bond portfolios at banks requires the quantification of credit spread risk to avoid undesired effects in the P&L result. For that purpose it is necessary to separate the credit spread risk from the interest risk position of the bond, to recognize term-time valuation results [...]
Using different interest rate curves in customer business and ALM/risk management may lead to “management mistakes” as well as adverse effects on the bank result. Another issue are the liquidity costs of the pool banks contained in the EURIBOR/LIBOR rates, which make it impossible to cleanly calculate and manage interest and liquidity risk. The [...]
The management of liquidity risk and the necessary allocation of liquidity costs has gained in importance since the financial crisis – not only due to new regulatory requirements, but also from an economic point of view in bank management. Besides the calculation of the stress capital commitment, this requires the transparent derivation of the [...]
Interest and liquidity risk management of the banking book by ALM are especially challenging for non-bullet loans or deposits. Using the simple average of reference rates results in undesired customer margin volatilities, due to constant capital repayment until maturity. This drawback may be avoided by using term weighted tranches/reference rates. The article gives an [...]
In a transfer price system, margin stability in the customer business is crucial. This requires risk positions (interest, liquidity) to be manageable by ALM. Using “dirty” transfer price models for managing positions without contractually defined maturity affecting income, may result in substantial problems in hedging and fluctuations of the bank result. The article gives [...]
Setting up a “sound” capital commitment balance is a very important issue in a bank’s current bank management/ALM and governance/compliance. Based on the capital commitment balance, the bank manages the pricing of the customer business (liquidity costs) and the liquidity in ALM; measures the refinancing risk (necessary liquidity buffer) and calculates the liquidity cost [...]
Products with undefined interest and capital commitment are frequently found in European universal banks’ product portfolios and the margin on these products is a major source of net interest income. Managing these products and the resulting interest risk position depends on a professional method of transfer pricing which is becoming more and more important [...]
