Can you stay afloat in the new wave of regulations?

Regulatory environment

The material regulatory changes introduced in recent years, along with ones projected for near future, shall substantially affect the management of assets and liabilities in banks. 

Key challenges facing the banking sector in this respect include:

• Intrest rate risk in the banking book (IRRBB): new guidance of the European Banking Authority, introduced in 2018 and effective as of 1 July 2019.
• Benchmark requirements regard the manner of quoting benchmarks and calculating the reference interest rate indexes (LIBOR/EURIBOR, etc.) by banks. 

The above changes posed substantial challenges for banks and required more effort from units in charge of ALM and market risk management. 

Survey focus

In the survey we assessed the below aspects and practices at the banks:

1. Risk estimation and measurement

• Division of responsibilities concerning planning
• Approaches applied in relation to interest rate risk
• Approaches applied in relation to liquidity risk
• ALM model validation
• xVA models and adjustments

2. The role of ALM units in banks

Key findings of the survey

The results of the survey indicate that banks are still facing certain compliance challenges related to IRRBB management requirements as presented by EBA in July 2018. 

Risk estimation and measurement

• For the purposes of balance sheet development scenarios, most banks use data prepared by their business units.
• ALM units participate in the development of market scenarios regarding liquidity and interest rate.
• Checking whether banks used methods and scenarios other than those defined by the regulator for IRRBB management purposes, Deloitte learned that 21 banks used additional methods and scenarios for at least two of the discussed processes.
• 14 out of 33 banks applied dynamic balance sheet assumptions to estimate IRRBB.
• A majority of banks (19 of 33) participating in the survey used the conditional cash flow modelling.
• Most surveyed banks used both measures indicated in the EBA 2018/02 guidelines, i.e. NII and EVE.
• Vast majority of the surveyed countries use liquidity indicators based on LCR / NFSR methodology. 
• Out of the 30 banks that analyse liquidity gap, 17 apply both contractual gap and behavioural gap.
• 25 banks use stress tests and/or scenarios, with 10 using both solutions.
• Most banks use expert scenarios in stress-testing of liquidity risk. 
• In most cases, for stress-testing purposes, banks do not assume changes in interest rates.  
• Regarding ALM model validation, most banks validate net interest income (NII) models, but less than half validate economic value of equity (EVE).
• Fifteen of the 33 survey participants did not implement the xVA methodology.

The role of ALM units in banks

The role of the ALM function in banks is getting more and more important under the new regulations. Based on the comparison to former Deloitte surveys and individual meetings with bank representatives in the course of the survey, we have noticed the growing role of the finance function, related to the responsibility for ALM. Quite frequently, the finance function is in charge of both setting strategic directions for balance sheet remodeling, analytical/operational support and of planning. From the long-term financial planning perspective, situating ALM in finance allows recognising business development and aligning the growth and structure of equity and liabilities with the planned growth of business operations. Out of 33 survey participants, in 21 the ALM function was located in finance or reported to CFO. 

Please reach out to us if you are interested in this survey in more detail.