Considerations for ALM in Low and Negative Interest Rate Environments

Thomas Becker, Raphael Bulut and Steve Uschmann

Asset and liability management (ALM) includes the management of interest rate risk arising from a bank’s business activities. In cases of very low or even negative interest rates the behaviour of bank risks presents new challenges. Usually, ALM functions are also tasked with stabilising net interest income (NII) banking book business revenues; in an environment of negative yields this objective becomes difficult to achieve. Customers may behave differently, which challenges product modelling assumptions, and certain products reveal inherent optionalities that need to be looked at carefully. This chapter illustrates objectives of ALM functions in banks and its difficulties in low-yield environments with a focus on the impact on interest rate risk management. Liquidity management aspects are left aside. We look at the impacts on modelling of products with behavioural aspects and countermeasures to deal with margin erosion. Finally, we illustrate the different views of regulators and developments in legislation, and discuss their effects on banks’ risk management. The chapter concludes with an analysis of market changes caused by technological and competition changes.


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